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:
- If your threshold income is more than £240,000 or your adjusted income is more than £240,000, the Tapered Annual Allowance will apply. Here, your Annual Allowance is reduced by £1 for every £2 your income exceeds these thresholds. If you earn more than £312,000, your Annual Allowance is likely to be just £4,000.
- If you have already flexibly accessed your pension, you may be subject to the Money Purchase Annual Allowance. This can reduce the amount you can tax-efficiently save into a pension to £4,000 per tax year.
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:
- A Cash ISA is a savings account, and the interest you earn is tax-free. Some Cash ISAs are subject to restrictions, such as how much you can withdraw. These typically offer higher interest rates.
- A Stocks and Shares ISA allows you to invest in stock markets and other assets. Returns are tax-free. As with all investments, a Stocks and Shares ISA is suitable for long-term saving, typically five years or more.
- If you’re aged between 18 and 39 you can open a Lifetime ISA (LISA) and contribute up to £4,000 a year. You will receive a 25% government bonus on your contributions. A LISA can be either a Cash or Stocks and Shares ISA but note that you will be penalised if you make a withdrawal before age 60 for a purpose other than buying your first home.
- An Innovative Finance ISA is designed for peer-to-peer lending investments. Usually, these kinds of investments are higher risk than traditional alternatives and, therefore, are not appropriate for most investors.
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:
- Standard CGT rate: 18% on residential property, 10% on other assets
- Higher CGT rate: 28% on residential property, 20% on other assets
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 firstname.lastname@example.org or call (0161) 8080200.
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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