Your guide to the new tax year and the allowances and exemptions you can use

Over recent weeks, the news headlines have been dominated by one story. The health, economic and societal impact of the coronavirus pandemic have filled newspapers and news bulletins for a couple of months, and normal life has taken a back seat as we navigate the new normal.

During these unprecedented times, it’s easy to have forgotten that we have moved into a brand-new tax year. So, while you may have other priorities at the moment, it is worth considering the opportunities that a new tax year brings. Here’s your complete 2020/21 tax year summary and the allowances and exemptions you should be considering.

Use your new pension allowances

The pensions Annual Allowance remains at £40,000 in the 2020/21 tax year. This means you can pay up to 100% of your earnings or £40,000 (whichever is the lower) into your pension in the 2020/21 tax year and retain tax relief.

In the March Budget, the Chancellor made some changes to pension allowances. The most notable was the change in thresholds at which the Tapered Annual Allowance comes into effect.

With the thresholds rising by £90,000, if your ‘threshold income’ is above £200,000 you need to check if your ‘adjusted income’ (all income that you are taxed on including dividends, savings interest and rental income, before tax plus the value of your own and any employer pension contributions) is more than £240,000.

If it is above £240,000, your Annual Allowance will reduce by £1 for every £2 that your ‘adjusted income’ exceeds £240,000. You’ll be able to contribute less to your pension and retain tax relief.

If your total income (including pension accrual) is over £300,000 you will see a significant reduction in the amount you can contribute to a pension and retain tax relief. This is because the Annual Allowance now tapers to £4,000 rather than £10,000.

The government also announced that the Lifetime Allowance (the maximum amount you can accrue in a registered pension scheme in a tax-efficient manner over your lifetime) will rise to £1,073,100 in the 2020/21 tax year.

Now we’re in a new tax year, you can use your 2020/21 pension allowances. If you need advice concerning the various pension allowances and any that may apply to you, we can help. Please get in touch for a chat.

Another chance to maximise your ISA contributions

During his first Budget, the Chancellor made no changes to the ISA. So, you can still contribute up to £20,000 to your ISA in the 2020/21 tax year. Interest received on a Cash ISA is paid tax-free, while returns on a Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax.

The beginning of a new tax year is a great time to top-up your ISA. Investing in April gives your savings/investments more time to potentially grow tax-efficiently than waiting until the deadline for contributions in March or April 2021.

Use the increased Junior ISA allowance

In this year’s Budget statement, the government said: “By saving towards their future, families can give children a significant financial asset when they reach adulthood – helping them into further education, training, or work.”

To support this, the Chancellor announced that the annual subscription limit for the Junior ISA (JISA) and Child Trust Fund (CTF) will more than double in the 2020/21 tax year, from £4,368 to £9,000.

This means that you can now contribute up to £9,000 into a tax-efficient savings vehicle for your child or grandchild.

Tax and National Insurance allowances in 2020/21

During his first Budget, Rishi Sunak had little to say regarding changes to tax and National Insurance contributions.

National Insurance Contributions

The Chancellor’s main announcement was to meet a manifesto commitment to raise the National Insurance contribution threshold. Employees will now pay Class 1 National Insurance Contributions (NICs) at a rate of 12% for earnings between £9,500 and £50,000 a year. An extra 2% is applied on earnings above this threshold.

The Budget increased the threshold from £8,632 and the government estimates the average employee should be around £104 better off.

Self-employed workers who earn over £6,365 a year will pay Class 2 NICs at a flat rate of £3.05 per week. If you are self-employed and you earn over £9,500 a year you will pay Class 4 contributions of 9% of profits between £9,500 and £50,000 per year, plus 2% of any earnings above that.

Income Tax

The Personal Allowance remains at £12,500 and so you can earn up to this amount before you begin to pay Income Tax.

• Basic rate tax at 20% is paid on your taxable earnings between £12,500 and £50,000
• Higher rate tax at 40% is paid on earnings from £50,000 to £150,000
• Additional rate tax at 45% is paid on earnings over £150,000.

If you earn more than £100,000 a year, your Personal Allowance is reduced by £1 for every £2 earned over the £100,000 threshold. If you earn £125,000 or more, you’ll have no Personal Allowance.

Capital Gains Tax

As we are in a new tax year, you can use your annual Capital Gains Tax exemption which has risen slightly in the 2020/21 tax year to £12,300. Basic rate taxpayers continue to pay 10% tax on capital gains, and higher and additional rate taxpayers pay 20%.

For second properties, including Buy to Let investments, capital gains will continue to be taxed at 18% for basic rate taxpayers, and 28% for higher and additional rate taxpayers.

Inheritance Tax

Inheritance Tax (IHT) remains payable at the rate of 40% if the value of your estate exceeds the nil rate band (NRB), which is £325,000.

In the 2020/21 tax year, the Residence Nil Rate Band (RNRB) has risen to £175,000. This means you benefit from an additional £175,000 in tax-free allowance if you’re passing your home to a direct descendant.

The annual gift exemption remains at £3,000. As we are now in a new tax year, you can utilise this exemption. You can carry forward one year’s allowance, so if you didn’t make a gift in 2019/20 you can gift up to £6,000 in this tax year.

Dividend Tax

The tax-free dividend allowance remains at £2,000 for the 2020/21 tax year.

If you earn dividends above the £2,000 threshold and you’re a basic rate taxpayer, you’ll pay 7.5% tax. Higher rate taxpayers pay 32.5% and additional rate taxpayers will be charged 38.1% tax on dividend income over the allowance.

Now is a great time for a financial review

The beginning of a brand-new tax year is a great time for a financial review. This is especially true during these uncertain times if you’re worried about your own personal finances in light of the lockdown and recent stock market volatility.

Get in touch

If you would benefit from a financial review, or you’d like advice on any of your allowances or exemptions, please get in touch. Email info@depledgeswm.com or call (0161) 8080200.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.

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