Some changes were made in the Budget earlier this year, and at the start of April, but due to the dominant global events during 2020 so far you might have missed them.
Here are the allowances you’ll need to be aware of when planning for the year ahead.
1. Pension Annual Allowance
There was no change to the Annual Allowance.
This is the amount you can contribute to your pensions and still receive tax relief and it remains at £40,000. Different allowances can apply depending on your circumstances though, and if you are a high earner, you’ll want to be aware of changes to the Tapered Annual Allowance.
2. Tapered Annual Allowance
There was a significant – and much anticipated – change to the Tapered Annual Allowance.
This is triggered if you earn over a certain amount and both the threshold income and adjusted income limits have increased by £90,000 for the 2020/21 tax year, taking them to £200,000 and £240,000 respectively.
The Tapered Annual Allowance reduces the standard Annual Allowance by £1 for every £2 of income you receive if your threshold income is over £200,000. The reduction is applied to adjusted income over £240,000 and could reduce your Annual Allowance to £4,000, a change from the previous minimum amount of £10,000.
If you are affected by the Taper, you might find these changes allow you to save more tax-efficiently this tax year, but the change in the minimum Annual Allowance might also limit the amount you can save, whilst receiving tax relief.
If you’d like to discuss any element of your pension allowances or the changes to the Tapered Annual Allowance, please get in touch.
3. Money Purchase Annual Allowance
There is no change to the MPAA for the 2020/21 tax year.
The allowance, which came into force alongside Pension Freedoms, is triggered when you ‘flexibly’ access any taxable DC pension funds you hold and reduces your Annual Allowance to £4,000.
If you’re thinking of taking a DC pension but want to continue making contributions, you’ll need to be aware of this allowance.
4. ISA allowance
The ISA Allowance also remains unchanged. You can save £20,000 into an ISA during the current tax year.
Interest earned from a Cash ISA is tax-free and gains made in a Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax (CGT). The £20,000 allowance covers all ISAs you hold which means the amounts you pay in can be spread over multiple investments.
5. Junior ISA (JISA) allowance
The Budget did see a change to the allowance for Junior ISAs. The previous limit of £4,368 has been increased to £9,000. This means you can save up to £9,000 into a JISA, per child, with any interest or returns tax-free.
If you plan to save for a child or grandchild this tax year, be aware of this increased limit and maximise your tax-efficient savings.
6. Capital Gains Tax allowance
You pay Capital Gains Tax (CGT) when you sell certain assets and make a profit and the rate of tax you pay depends on the type of asset you sell and your Income Tax rate. CGT could be as high as 28%.
The CGT allowance has increased to £12,300 for 2020/21. If you plan to dispose of assets during the current tax year, bear this allowance in mind.
7. Business Asset Disposal Relief
There have been several changes made to Business Asset Disposal Relief for the 2020/21 tax year, including its name – before 6 April 2020, it was known as Entrepreneur’s Relief.
The relief reduces the amount of CGT you pay when selling your business, under certain circumstances. In the previous tax year, selling your business in a way that triggered the relief would have seen you charged 10% on the first £10 million of gains.
The relief for the 2020/21 tax year has been cut and tax at 10% is only applicable for the first £1 million of gain made. After this, tax is charged at the normal rate of 20%.
Selling a business could result in significantly higher CGT this tax year.
8. Dividend allowance
The Dividend Allowance remains unchanged for 2020/21.
You won’t pay tax on dividends you receive up to the value of £2,000 and this includes dividends you pay to yourself as a company director too.
Dividends above £2,000 are taxed at your marginal rate.
9. Gifting annual exemption
If you intend to leave an inheritance to your children but worry about leaving them with a large Inheritance Tax (IHT) bill you might consider providing them with a living inheritance, making use of gifting exemptions.
There are no changes to the Annual Exemption for the 2020/21 tax year.
You can gift up to £3,000 a year tax-free. Remember too, that the exemption can be carried forward for one year and applies per individual. This means that couples can gift £6,000 a year, or £12,000 if neither of you used your Annual Exemption last year.
Get in touch
If you’re unsure about the allowances that apply to you, or the impact of any changes for this tax year, speak to us. Please email email@example.com or call 0115 933 8433.
The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Autority does not regulate tax advice.