The great benefit of tax allowances and reliefs is that they reduce the amount of tax you pay, leaving you with more disposable income. As a Christmas gift to yourself, why not spend time to check whether you are making full use of your reliefs and allowances? Doing so could put substantial money into your pocket now, or even more for your future retirement.
In this guide, our financial planning team here at Vesta Wealth offers a range of important tax reliefs and allowances which you may wish to check during this Christmas break. We hope you find this content useful and invite any questions you may have about how this could affect your financial goals and circumstances, via:
t: 01228 210 137
e: [email protected]
1. The personal allowance
In 2020-21, each UK resident is entitled to receive up to £12,500 income without paying any income tax. This personal allowance is automatically applied for employees via payroll, and if you have a spouse who earns below the threshold, or who does not work, then they may be able to transfer £1,250 of their unused allowance to you.
2. The capital gains tax allowance
The capital gains tax-free allowance for 2020-21 is £12,300. As it cannot be carried forward to the next tax year, if you are planning to sell some of your assets in the next year (e.g. moving equity portfolio investments which have made a profit into an EIS investment), it may be worth doing at least some of this before 6th April 2021, if you will not otherwise make use of your full allowance.
Married couples and civil partners can also transfer assets to each other without suffering CGT.
3. The personal savings allowance
This allowance enables basic rate taxpayers to earn up to £1,000 in savings interest, tax-free. For higher rate taxpayers the threshold is £500 (nil for additional rate taxpayers). Due to current low interest rates, most people will not get near this threshold, but if you do then you may wish to consider an ISA which allows you to earn interest without attracting tax (see later).
4. The dividend allowance
The UK’s tax-free dividend allowance is £2,000 in 2020-21. Above that level, those on the basic rate pay 7.5% and higher rate taxpayers are charged 32.5%.
As dividend tax rates are lower than income tax rates, for those earning both dividend income and income from other sources, your accountant or Financial Planner may be able to suggest a balance which reduces unnecessary tax. A company director, for instance, could reduce their overall tax bill by lowering their salary out of the higher rate, and raising their dividend income.
5. The ISA allowance
For some time now, one of the most popular saving and investment vehicles in the UK has been the ISA. In 2020-21 you can save up to £20,000 into your ISA(s), but you cannot carry forward any unused allowance. Given that this lets you earn interest, capital gains and dividends without tax, it is worth considering whether any cash or investments held elsewhere may be better situated in an ISA. Speak to your Financial Planner before making any big decisions about your money.
6. The pension annual allowance
Christmas can be a good time to review whether you are making full use of your pension annual allowance, particularly as the end of the tax year is just over three months away and preparatory work may be required if all the information is not to hand.
In 2020-21, the standard annual allowance allows you to save up to £40,000 into your pension or up to 100% of your earnings for the tax year (whichever is lower). In addition, your contributions are also able to grow further by receiving tax relief at your marginal income tax rate. For example, it only costs a higher rate taxpayer 60p to put £1 into their pension (due to 40% tax relief).
Depending on your circumstances, you may also be eligible to use any unused allowance over the previous three tax years as well.
Bear in mind that your employer contributions also count towards your allowances, and if you are accruing benefits in an employer’s defined benefit scheme, it may be worth digging out copies of your annual allowance statements so you can see how much of your annual allowance has already been used.
As pension rules can be complicated, if you are considering making use of your pension annual allowance, please discuss this with your Financial Planner before making any decision.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.