As we move into 2021 in the financial world attention moves to the end of the current tax year on 5th April 2021 and the importance of making sure clients have used all their tax free allowances which the government gives them. In this blog I have summarized the allowances available and give examples of how to use them. There is still time to make use of these valuable allowances before we exit the current 2020/21 tax year…
Personal Allowance
Everyone including children is given an allowance each tax year which allows us to earn money and not pay tax – its called the personal allowance. Currently this is £12,500 which means you can have taxable earnings from employment, self-employment and pensions and not pay any tax on this up to the allowance amount. For married couples and civil partners, it is possible for them to share some of this if one partner is not using all their allowance. The partner who is not using their full allowance can give their partner up to 10% to boost their partners personal allowance and save income tax – for full details pleaser visit - Marriage Allowance – GOV.UK (www.gov.uk)
Savings Allowances
If you do not have any taxable income from earnings or are a basic rate taxpayer, you also qualify for £1,000 of savings income to be earned tax free. If you are a higher rate taxpayer this allowance is reduced to £500 and if you are an additional rate taxpayer, you receive no savings allowance.
There is also the starting rate of tax for savers where their taxable income plus their savings income is below £17,500pa. The good news here is that all savings income below the threshold (£17,500) when added to any other taxable income is tax free. So, it’s possible if you fall into this bracket you could receive up to £5,000 of tax-free savings income.
Dividend Income
Each personal can receive £2,000 of dividend income tax free each tax year. This can be dividends from company shares that you hold as an investment or profits from a Ltd company or investment income from a unit trust.
Capital Gains Tax
When you own shares or a company or an investment property at some stage you may want to sell them. Depending on your tax rate a basic rate taxpayer pays capital gains at 10% (18% for property) and a higher or additional rate taxpayer pays tax at 20% (28% for properties). If they have made a profit you will be liable to Capital Gains Tax (CGT) on the profits.
Each person gets an allowance of £12,300 per tax year. So, you can make £12,300 from profits of selling shares, a company or an investment property and not pay tax. You can also bring forward any losses from previous capital sales in previous tax years. A really good annual task is to ensure you make use of this allowance. If you hold shares or unit trusts you can move these into an ISA (please see below for details) to make use of your Capital Gains Allowance. If you move shares or unit trusts into an ISA it is classed as a sale and any profits subject to CGT. Provided you do not breach the CGT allowance you will not be liable for tax and then any future profits or dividend income will be sheltered from tax via the ISA.
Pension Contributions
The most tax efficient way of saving for the future is to put money into a pension. You are able to contribute up to £40,000 gross into pensions each tax year. You must have taxable earnings to cover this and you cannot contribute more than your taxable earnings amount. You can pay in more than £40,000 if you have taxable earnings higher than £40,000 by using unused allowances from the 3 previous tax years. This is a complex area, and we recommend you seek advice before doing this.
Even if you do not have taxable earnings you can still pay in up to £2,880pa into a pension and the government will top it up with £720 to £3,600 giving you 20% tax relief.
Individual Saving Accounts (ISA’s)
Each tax year you are able to put up to £20,000 into an Individual Savings Account (ISA) where any interest, investment growth or dividend income is received tax free no matter what your tax rate. You can hold your money in a savings account, buy individual stocks and shares or invest in mutual funds depending on your risk appetite.
Junior ISA’s
At the start of the current tax year the chancellor boosted the amount that can be saved for children tax free into ISA’s. A whopping £9,000 per tax year can be saved in the same investment vehicles as for ISA’s above. But beware the child can get access to the funds at age 18 whether you want this to happen or not.
You can also save an additional £25pm into friendly society plans with no tax to pay on interest and gains for children. National Savings now allow premium bonds (up to £50,000 per child) to be held in children’s names. Any winnings are tax free.
Venture Capital Trusts
For the more adventurous who are happy to invest in start-up companies the government gives tax relief of 30% if you invest in venture capital trusts (VCT). So, if you invest £10,000 into a VCT when you complete your tax return you will get £3,000 back off your tax bill. You can invest £200,000 per tax year in VCT’s. Again, we recommend you seek advice in this area as these investments by their nature are risky and you need to fully understand all the rules for gaining tax relief and keeping it.
So, to make sure you are as tax efficient as possible please make use of these allowance where possible. We always recommend you seek advice to make sure you are saving and investing in the most appropriate place for your individual needs. You should also watch out for the budget that is currently being held on 3rd March 2021 to see if these allowances will change on 6th April 2021 with the start of the new tax year.
For up-to-date, impartial advice, don’t hesitate to get in touch today.
