Will you be utilising your tax allowances for the 2020/21 tax year?

The 6^th April marks the start of the new tax year. We have summarised the key tax allowances relevant to personal financial planning. The personal income tax allowance. There was no change to the personal allowance in the budget on 11^th March, it remained at £12,500 meaning that individuals can earn £12,500 before paying income tax. There are some caveats, such as people earning over £125,000 do not have a personal allowance, but there are other allowances available for higher earners which I have touched on later. The savings allowance. It is often forgotten that in addition to the £1,000 savings interest allowance (£500 for higher rate taxpayers) there is a savings allowance of £5,000. Lower earners can have £18,500 of tax-free income through the personal allowance of £12,500, the savings interest allowance of £1,000 and the savings allowance of £5,000. Tax free savings and investments. A UK resident can save up to £20,000 per tax year into an ISA – an Individual Savings Account. All interest, dividends and gains made within ISA’s are tax free. There are different types of ISAs; an investment ISA, cash ISA, Junior ISA, Lifetime ISA and Help to Buy: ISA. The Junior ISA savings limit will increase to £9,000 per tax year from 6^th April. The dividend allowance. If you have investments outside of an ISA tax wrapper that hold company shares either directly or through funds, the first £2,000 of dividend income is tax free and this is regardless of an individual’s income tax position. Capital gains tax. If you make a gain on an asset, such as investments and property, each person has a capital gains tax allowance which is £12,300 for this tax year. Pension contribution allowances. An individual can pay up to 100% of earnings into a pension and obtain full tax relief. There is a contribution cap of £40,000 and, since the March 2020 budget, this reduces if your income exceeds £240,000 (it reduces on a tiered basis). If you are a higher rate taxpayer and you pay £10,000 into pension, the government adds £2,500 to your pension and you claim a further £2,500 through your tax return. This is an uplift of 50% on your £10,000 contribution. Although it can appear complicated, utilising pension contribution allowances can be a valuable way to save for your retirement. Tax efficient investments for higher earnings. An individual can claim back income tax paid by investing up to £200,000 into a Venture Capital Trust (VCT). VCTs were introduced in the 1990’s to encourage investment into new and early stage UK companies. You can claim 30% income tax relief so an investment of £100,000 can reduce your income tax bill by £30,000. Enterprise Investment Schemes (EIS’) also fall into the category of tax efficient investments for higher earners. There are many factors to consider before investing into VCTs and EIS’ and we recommend that regulated financial advice is sought. The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested. HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.