Making the most of your allowances

If recent carefully leaked reports are to be believed, some big tax changes are on the horizon. With the new measures to stimulate the economy announced in the Chancellor’s recent statement, there could be a deficit of £350 billion to pay for. Mr Sunak is supposedly considering a range of measures, from a penny on income tax to higher rates for the self-employed to help pay for the crisis.

Even before the pandemic the state was facing a tax shortfall, and in need of extra billions to pay for an ageing society. It looks as though we are all going to have to get used to the idea that the taxman will help himself to a bigger slice of our income in the near future – and expect substantial tax increases in the autumn budget.

At Continuum we believe that makes it all the more important to make sure we are not paying a penny more than we need to and take full advantage of the latest round of tax allowances.

What are tax allowances?

The tax rules are complicated, but they do allow us all to earn or receive some income before income tax kicks in. These are known as your allowances.

Once you cross this tax threshold, you start paying tax – but only on the amount above your allowance. Each year in the budget the Chancellor reviews the allowances, and you need to ensure that you are claiming all that you are entitled to keep your overall tax bill as low as possible.

Annual Pension Allowance

The Annual Allowance is the total you can pay in every year, including contributions from your employer. Any contributions you make above it will be taxed at your usual rate.

The annual allowance for 2020/21 will stay at £40,000.

Talking to an expert could help you see if your savings can provide the kind of retirement income you want. It may help you decide whether you need to save more, or if there are ways to make your savings money in your pension grow harder.

A pension review could help you see the actual figures – and look at the best ways to arrange the income you want.

Annual ISA Allowance

There are several types of ISA, as Individual Savings Accounts are better known. They have become a firm favourite with savers, as they protect the interest your savings earn from the taxman.

The ISA allowance, the amount you can invest in an ISA each year is unchanged – but it is worth remembering just what it is.

Whether you invest in a Cash ISA, or a Stocks and Shares ISA (also known as an Equity ISAs) or a combination of both, thelimit for the 2020/21 tax year is £20,000. Speak to us today to make your ISAs savings as effective as possible.

Personal allowance

Most taxpayers living in the UK are entitled to Personal Allowance.

This tax year – 2020/21 – it is £12,500 unless your adjusted net income is above £100,000. Above this figure you will lose £1 of personal allowance for every £2 earned. The effect of this is that you pay more than the 40% tax rate you may have expected as a high earner.

Marriage Allowances

There are actually two types marriage allowance. Marriage Allowance, for couples where both were born on or after 6 April 1935, and Married Couple’s Allowance, where at least one member was born before 6 April 1935.

Married Couples’ allowance is worth between a minimum of £3,510 and a maximum of £9,075 in the current tax year 2020/2021. The tax saving will be dependent upon your age as well as your income. It can simply be set against your tax bill.

Marriage Allowance or Marriage Tax Allowance is more complicated. The marriage tax allowance allows you to transfer £1,250 of your personal allowance to your spouse or civil partner if they earn more than you. If your claim is successful, it will lower the higher earner’s tax bill for the tax year, and you can also backdate your claim.

Personal savings allowance

Basic-rate taxpayers can earn up to £1,000 in savings interest for 2020-21. Higher-rate taxpayers can earn up to £500 in savings interest for 2020-21- but additional-rate taxpayers will not have a personal savings allowance.

Dividend allowance

The first £2,000 you receive in dividends from investments is tax-free and known as your dividend allowance. Above this you start paying tax – at a rate of 7.5% for basic-rate taxpayers, 32.5% for higher-rate payers, and 38.1% for additional-rate payers.

Capital Gains Tax

If you sell property other than your home, you may be liable for Capital Gains tax. The Capital Gains tax-free allowance, or Annual Exempt Amount is £12,300.

What about VAT?

If you run a business in the leisure sector, you may be able to take advantage of the temporary rate cut. VAT is being cut from 20% to 5% for six months.

Paying too much?

If you have not received all the allowances you are entitled to, you can make a backdated claim for them from HM Revenue and Customs (HMRC) by phoning the Taxes Helpline on 0300 200 3300. However, there is a time limit.

In practice, if you receive earnings or an occupational pension, this income is taxed through the Pay As You Earn (PAYE) system. Every payday you will get either 1/52 of your Personal Allowance if you are paid weekly, or 1/12 of your personal allowance if you are paid monthly. But things can get a more complicated if you have more than one source of income. Paying more than you need to can go unnoticed, such are the complications of the tax system. Expert help can be valuable.

At Continuum we can work with you to help ensure that your tax bill is no higher than it should be, and that you are making full use of all the available allowances.

We can give you individual support from a tax expert as part of our service to help you make the most of your wealth.

The information contained in this article has been compiled on Continuum’s understanding of current HMRC tax rates applying for tax year 2020/21

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 advice.