The tax year is drawing to a close, and in part 3 of a 3-part series on tax allowances, we look at making the most of your personal allowance for 2019/20.
The taxman can be generous and provides us all with a number of allowances – chances to make or spend our money which will not prompt him to take a share of it.
Making the most of these concessions from the taxman is vital to make the most of your money. There is likely to be a budget in March 2020 which could affect the allowances for the new tax year, but we can look at what they are currently – and how at Continuum we may have some ways to help you cut the tax you pay.
Your Personal Allowance
Everyone has a personal allowance, the amount of income they can earn each year without paying tax. For the 2020/21 tax year, the personal allowance looks set to remain at £12,500.
This means that basic rate tax payers, who pay tax at 20% will do so on everything they earn from £12,501 to £50,000. Higher rate taxpayers will pay 40% on £50,001 to £150,000, and additional rate payers, must hand over 45% of their earnings over £150,001 to the taxman.
However, if you are married or in a civil partnership, you may be able to save money by structuring your finances as a couple to use two tax allowances. This could be an especially good idea if one of you pays tax at a lower rate than the other. If one transfers income-generating investments to the other their Income Tax allowance, might help you cut tax overall.
There are some pitfalls to this type of arrangement. Getting expert help from a Continuum expert could help you avoid them
Your Personal Savings Allowance (PSA) –
PSA was introduced in April 2016. It means that most savers no longer have to pay income tax on a level of the income, or interest on their savings.
Your PSA depends on which income tax band you are in. Basic rate taxpayers are entitled to a £1,000 allowance. Higher rate taxpayers receive a £500 allowance. Additional rate taxpayers have no PSA and must pay tax on all the interest their savings earn.
This could mean that if you are a higher rate taxpayer, a traditional savings product may not be a tax efficient choice for you. At Continuum we can help you discover some more efficient solutions – such as ISA investments.
Your ISA allowance
ISAs are exempt from income tax and capital gains tax. You don’t pay any tax on any money you withdraw, which makes them an important part of most people’s wealth strategy.
You can split your allowance across a Stocks and Shares ISA, Cash ISA, Lifetime ISA and an Innovative Finance ISA. You may be eligible for a Lifetime ISA, which can offer government bonuses as well as investment growth.
The ISA allowance for the new tax year is set to be £20,000. Making the best use of your allowance is obviously vital.
Our knowledge of the ISA market can help you ensure you have the ISA that is right for your circumstances.
Investors who receive an income from dividends will find that they are paying tax on everything they make above £2000, at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
If you are a higher-rate or additional-rate taxpayer, you might consider more complex tax-efficient investments such as Venture Capital Trusts (VCTs) which invest in smaller, younger and unquoted companies. These can mean a high level of investment risk, but they also offer generous tax breaks to compensate for the added risks.
Your Continuum adviser will be able to discuss whether these could be suitable for you.
The pension annual allowance is currently £40,000, or the value of your whole earnings – whichever is the lower. There is some speculation that this might change after the budget.
Your pension may be your most important investment of all. Getting the pension arrangements that are most beneficial to you – and not the taxman – is essential.
At Continuum, we can help you structure your pension in the most appropriate way, whether or not you have started drawing it.
Allowances for gifts
You can’t simply give money away. Gifts to your husband, wife or civil partner are free, but other gifts are subject to allowances. You can make gifts of up to £3,000 each tax year, and unlimited individual gifts of up to £250 per person. You can make wedding gifts of up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, or £1,000 to anybody else.
The gift allowances don’t stop there – and crucially, giving away assets can reduce your estate, which in turn reduces your tax liability for inheritance tax purposes.
At Continuum we can help you use gifting as part of wider inheritance tax planning
Why call Continuum now?
The rules on allowances are clear – but there are many ways to make the most of your allowances and entitlements. At Continuum we can help you use them as a part of an integrated financial strategy, designed to help you make the most of all your money.
Why not call us today?
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
The tax rates applying are subject to the individual circumstances of the investor.
The Financial conduct authority does not regulate taxation advice.
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