We are all set to make the most of the summer. But we can have more to enjoy all year round if we also make the most of our tax allowances.
The taxman takes quite enough of your hard-earned cash – but he does provide plenty of allowances. With a little help from Continuum, you could be using those allowances to the full, and boosting your current income and your future wealth.
We look at the allowances you need to know about.
The personal allowance is the amount of money you can earn before having to pay income tax. In April, it rose to £12,500, with earnings above that level subject to income tax of 20%. That’s an extra £650 of tax-free income compared with last year.
The higher rate threshold also increased. You can now earn up to £50,000 before you start paying higher rate income tax at 40%, on the proportion of your earnings after this level.
Are you an additional rate payer? The additional rate band, with 45% tax applied remains at £150,000 after the tax-free allowance has been deducted, but you will still pay less because of the higher thresholds for basic and higher rate tax.
If you are married or in a civil partnership you may be entitled to the marriage tax allowance. This allows couples to transfer a proportion of their personal allowance between them. This allowance is now £1,250, meaning a potential tax saving of £250.
Personal Savings Allowance (PSA)
With current low interest rates, you need all the help you can get to make the most of your savings income. The personal savings allowance allows you to earn up to £1000 interest tax-free. But things are a little more complicated if you are a higher rate taxpayer, and you will only enjoy £500 of savings income without tax – while additional rate taxpayers get no allowance at all.
Conversely, if you’re a low earner, there’s the starting rate for savings income allowance. This allows you to earn another £5,000 a year in savings interest before you pay tax on it if you earn less than £12,500 this tax year.
Dividends are the income that your shares earn if the company makes a profit. You have a tax-free dividends allowance of £2,000, above which basic rate payers will pay 7.5%, higher rate payers 32.5% and additional rate payers 38.1%.
Of course, if your shares are held in a stocks & shares ISA dividends are always tax-free.
ISAs allow you enjoy all your interest tax free – which is such a powerful advantage that the government sets a limit on how much you can put into ISAs each year. For 2019/20 the ISA allowance is unchanged at £20,000. However, the Junior ISA allowance, has risen from £4,260 in previous years to £4,368.
Capital Gains Tax
Capital gains tax (CGT) applies if you sell or give away an asset worth more than £6,000. It doesn’t apply for main homes, cars or lottery winnings, and a few other categories.
The Annual exempt amount is £12,000 for individuals. Above this basic rate payers pay CGT at 18% on residential property and 10% on other assets, and higher rate CGT payers face 28% on residential property and 20% on other assets. Your rate of CGT will depend on your other taxable income. You may need some help to understand exactly what your CGT rate will be – at Continuum we would be pleased to help you find the answer.
Pension Tax Relief
Paying into a pension can be very rewarding. Basic rate taxpayers receive 20% tax relief on their pension contributions. Higher rate taxpayers get 40% and top rate taxpayers 45%. Even if you’re not a taxpayer, you’ll still have a tax saving added to your contributions with an extra £20 for every £80 you pay into a pension up until you’ve contributed £2,880. This means the Government tops up your pension to £3,600.
Therefore, one of the most effective ways to reduce the amount of tax you pay and boost your future wealth may be to make the most of your pension allowance. Each year most people have a pension allowance of £40,000 or their total earnings, whichever is lower, and even non-earners have an allowance of £3,600.
Generally, you can put as much as you earn each tax year into your pension and receive tax relief, up to an annual contribution limit of £40,000. This limit, the annual allowance – includes the money you put into your pension, the basic rate tax relief the Government adds, and any contributions your employer makes.
However, for high-earners with incomes over £150,000, the £40,000 annual allowance is reduced.
If you use pension freedom rules to access your pension pot, your annual allowance will drop to £4,000 for that year.
Don’t forget there is also the pension lifetime allowance – a limit on the total value you can build up in all your pensions now £1,055,000.
How can you make your allowances work harder for you?
Paying too much tax is all too common. However, making the full use of your allowances could reduce your tax liabilities. To find out what might help you keep more of your money this summer – and for the years to come – it is time to call us at Continuum, and get one of our experts working for you.
The information contained in this article is based on the opinion of Continuum and their interpretation of the current HMRC Tax rates applying for tax year 2019/20.
The levels and basis of reliefs from taxation are subject to change and depend upon your own individual circumstances.
The Financial Conduct Authority does not regulate taxation advice.