It is almost the end of the tax year, and time to ask yourself whether your financial arrangements are making the most of your tax position.
We have looked at ISAs and pensions in parts 1 and 2 of this series, – but what other allowances could you be taking advantage of?
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 remained at £12,500.
Basic rate taxpayers will pay tax on everything they earn from £12,501 to £50,000 at 20%.
Higher rate taxpayers will pay 40% on £50,001 to £150,000, and additional rate payers, must hand over 45% of their earnings from £150,001 and above to the taxman – but all can take advantage of the personal allowance
But personal allowances may still be used to reduce tax under certain circumstances. If you are married or in a civil partnership, you may be able to structure your finances as a couple to use two tax allowances if one of you pays tax at a lower rate than the other. If one transfers their income generating investments to the other, thus making use of their unused allowance, it could help you both cut tax overall.
Personal Savings Allowance (PSA)
PSA means that many savers have no income tax to pay on the interest their savings earn, especially now that interest rates are low. Your level of PSA depends on your income tax band. Basic rate taxpayers are entitled to a £1,000 allowance. Higher rate taxpayers receive a £500 allowance, while additional rate taxpayers have no PSA. If you are a higher or additional rate taxpayer, you might find that having money in a traditional savings account could still mean paying tax on it.
This could be another reason to consider some more tax efficient solutions – such as ISA investments.
The rules about tax on dividends have been tightened in recent years, as successive Chancellors crack down on what they see as misuses of dividends by business owners.
This means that investors who receive an income from dividends will need to pay tax on everything they make above £2,000, 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 with some appetite for risk you might consider more complex tax-efficient investments. Venture Capital Trusts (VCTs) for example invest in smaller, younger and unquoted companies. These can provide generous tax breaks to compensate for the added risks.
The taxman does not like it if you give money away. Gifts to your spouse 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. Wedding gifts of up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, or £1,000 to anybody else are also allowed.
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.
The rules on allowances are clear – but there are many ways to make the most of them. 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.
There is still time to make the most of your allowances for the 2020/21 tax year, and start planning for the future – if you 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 or tax saving strategy, you should seek independent financial advice before embarking on any course of action.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
The Financial Conduct Authority does not regulate taxation or trust advice or will writing.
Investment value is not guaranteed and your capital is at risk. You may get back less than you originally invested.
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