5 valuable tax year end allowances that can really help you boost your wealth

8th February 2021

Have you used your valuable tax allowances for the 2020/21 tax year? If not, there is still time before the end of the tax year on 5 April.

Many of your allowances reset as we enter a new tax year and so if you don’t use them, you can often lose them. Making the most of the allowances on offer can help you to reduce your tax liability and to boost your wealth, so here are five allowances you should consider using before 5 April.

1. Your pension Annual Allowance

The pension Annual Allowance is the maximum that you can contribute to your pension each tax year while still benefiting from tax relief. This includes pension contributions made by your employer or other third parties.

In the 2020/21 tax year, for most people the Annual Allowance is £40,000, or 100% of your annual earnings, whichever is lower. However, there are two reasons why your Annual Allowance may be lower:

Using your Annual Allowance is important as it means you can make the most of your pension contributions by benefiting from the maximum amount of available tax relief. You can carry forward any unused Annual Allowance for up to three tax years, so now is your last chance to make use of your allowance from the 2017/18 tax year.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

2. Your Inheritance Tax gifting allowance

If you’re worried that your estate will be worth more than the Inheritance Tax threshold when you pass away, making gifts can help you to reduce the value of your estate and, therefore, the eventual tax liability.

One of the simplest ways to make a gift that is outside your estate immediately is to use the annual Inheritance Tax gifting allowance, which is £3,000 in the 2020/21 tax year. This means you can pass on up to £3,000 tax-free and, as the limit applies per individual, couples can gift up to £6,000 between them.

You can carry forward the exemption for one year, so if you didn’t use your gifting allowance in the 2019/20 tax year, this is your last chance.

3. Your ISA allowance

An ISA is a tax-efficient way to save or invest, and interest or returns are tax-free. In the 2020/21 tax year, you can pay up to £20,000 into ISAs, choosing one account or spreading your allowance across several.

There are four types of adult ISA to choose from:

In addition to the adult ISAs, the Junior ISA (JISA) is a tax-efficient way to save for a child. Like their adult counterparts, interest and returns are tax-free. The annual JISA allowance for 2020/21 is £9,000 and, while the child can begin managing their ISA from age 16, they cannot withdraw money until they are 18.

If you don’t use either the adult or Junior ISA allowance by the end of the tax year, you lose them.

Please note: Equity investments do not afford the same capital security as deposit accounts. Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.

4. Your Capital Gains Tax allowance

You pay Capital Gains Tax (CGT) when you sell certain assets and make a profit. Such assets may include shares that aren’t held in an ISA, a second property, or personal possessions worth more than £6,000 (excluding your car).

In the 2020/21 tax year, you have a CGT allowance of £12,300. This means you can make profits up to £12,300 before tax is due. In some cases, spreading out the disposal of assets across several tax years can help reduce CGT liability.

If you exceed your CGT allowance, your rate of tax will depend on other taxable income:

Using the Capital Gains Tax allowance each year helps you to reduce the amount of tax due when you dispose of assets. And, if you don’t use it before 5 April 2021, you will lose it.

5. Your Marriage Allowance

Your Personal Allowance is the amount of income you can receive in a tax year before Income Tax is due. For the 2020/21 tax year, it is £12,500 for most people.

The Marriage Allowance enables a husband, wife, or civil partner to give some of their unused Personal Allowance to their partner.

If you or your partner has an income below £12,500, the person on the lower income can pass up to £1,250 of their Personal Allowance to the other person, effectively increasing their Personal Allowance to £13,750. It’s a step that saves up to £250 in Income Tax.

To be eligible, you must be married or in a civil partnership. The partner with the higher income must pay Income Tax at the basic rate in England and Wales, usually meaning their income is between £12,501 and £50,000. In Scotland, they must pay the starter, basic or intermediate rate of Income Tax, usually meaning their income is between £12,501 and £43,430. 

Note that the Marriage Allowance can be backdated for up to four years, so you won’t lose the 2020/21 allowance at the start of the new tax year.

Get in touch

If you need help with your tax year end planning, or you want to make the most of the tax allowances available to you, please get in touch. Email info@depledgeswm.com or call (0161) 8080200.

Please note

The Financial Conduct Authority does not regulate estate and tax planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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