With so much speculation that the Government will soon make changes to taxes to help recoup the cost of the Covid bill, the pressure is on to use 2020/21 tax allowances as we hurtle towards tax year end on 5 April. Here we round up the available tax allowances
Each year you can pay as much as you earn, usually up to £40,000 (although this tapers down to £4,000 for higher earners) into a pension and benefit from pension tax relief. This is known as your annual allowance. There is also a lifetime allowance, which is the amount you can hold in pensions over your lifetime.
The Government automatically tops up pension payments by 20% and those paying higher or additional rates of tax can claim back another 20% and 25% respectively through Self-Assessment tax returns.
Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.
You may be able to take advantage of pension carry forward to make extra pension contributions by carrying forward unused pension allowances from the previous three years.
The ISA allowance for 2020/21 is £20,000 for adults and £9,000 for children. You can’t carry over an ISA allowance from one tax year to the next. ISAs are also free from Income Tax and Capital Gains Tax.
The Personal Savings Allowance is a tax-free allowance for interest payments. It is £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers don’t benefit from this.
All taxpayers receive a £2,000 tax-free allowance for dividend income.
Capital Gains Tax is a tax on the profits you make when you sell (or ‘dispose of’) something (an ‘asset’) that has increased in value. It is the gain you make that is taxed, not the amount of money you receive from the sale or disposal.
The Capital Gains Tax annual allowance is how much of a gain you can make in a tax year without paying any tax. It is sometimes referred to as the ‘forgotten allowance’ because it is less well known and understood than many other tax allowances. Using the Capital Gains annual allowance can be a way to create tax-free returns. The allowance is currently £12,300 but with the Chancellor asking the Office of Tax Simplification to review it, there is a lot of speculation that this could change.
There are a number of tax-free financial gifts that you can make each year. These financial gifts leave your estate immediately so there won’t be any Inheritance Tax to pay. These include:
Gifts to a civil partner, husband or wife (if their permanent home is in the UK)
Up to £3,000 in gifts each tax year. This can be carried over for one year giving a total of £6,000
An unlimited number of gifts up to £250 per person
Wedding gifts to a child of up to £5,000, to a grandchild or great-grandchild of up to £2,500 or to anybody else of up to £1,000
Unlimited payments towards the living costs of a child, elderly dependant or ex-spouse
Regular gifts from surplus income that don’t have an impact on your standard of living
It is often possible for those who are married or in a civil partnership to save money by structuring finances as a couple so both people’s tax allowances are used effectively. This could be an especially good idea if one of you pays tax at a lower rate than the other.
More complex and higher-risk tax-efficient investments such as Venture Capital Trusts (VCTs) offer generous tax breaks to encourage investment into smaller, younger companies. Because of the risks involved, these are not suitable for everyone but if you are a higher-rate or additional-rate taxpayer who can tolerate a high level of investment risk, you could also consider them*.
Our Bestinvest website has more information on VCTs.
If you’d like help with tax planning, Tilney is here. Have a look at our latest Tilney Event On Demand about tax allowances. Also, we offer free initial consultations with a financial planner to give you the opportunity to talk about your specific circumstances and goals and find out more about how we can help you.
The value of an investment may go down as well as up, and you may get back less than you originally invested. Please note we do not provide tax advice. Issued by Tilney Financial Planning Limited.
*VCTs should be regarded as higher risk investments. VCTs are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Owing to the nature of their underlying assets, VCTs are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change, and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.