Have you made the most of your 2020/21 tax allowances and exemptions? If not, now’s the time to act.
Making the most of the tax allowances you’re entitled to helps you to reduce your tax liability and boost your wealth. So, with 5 April just around the corner, here are five things you should be considering before the end of the tax year.
1. Maximise your ISA contributions
ISAs are a great way to build your wealth tax-efficiently, and if you use ISAs to build up your portfolio over time, the tax breaks can be very lucrative.
In the 2020/21 tax year each individual can contribute up to £20,000 to ISAs, which can include:
- Stocks and Shares ISA – this allows you to invest in the stock markets and other assets. Returns are tax-free. As with all investments, you should have a long-term outlook when investing
- Cash ISA – a Cash ISA is much like a savings account, but the interest you earn is tax-free. Some are instant access, while others require you to tie your money up for a fixed period, or have restrictions on withdrawals
- Lifetime ISA – if you’re aged between 18 and 39, you can open a Lifetime ISA. You will benefit from a 25% government bonus on your contributions but beware that you will face a penalty if you make a withdrawal from your Lifetime ISA before you turn 60 for a purpose other than buying your first home. A LISA can be a Cash or Stocks and Shares ISA
- Innovative Finance ISA – an Innovative Finance ISA is designed for peer-to-peer lending investments. Usually, these kinds of investments are higher risk than traditional alternatives and, therefore, are not appropriate for most investors.
If you want to, you can split your investment between two or more of the ISAs above. Note that the Lifetime ISA has a £4,000 limit in the 2020/21 tax year, so you could invest:
- £4,000 in a Lifetime ISA
- £6,000 in a Cash ISA
- £10,000 in a Stocks and Shares ISA.
Remember that the £20,000 contribution limit is for an individual, so couples can pay in up to £40,000 before 5 April.
In addition, if you have children or grandchildren under the age of 18, you can contribute up to £9,000 into a Junior ISA. These can be Cash or Stocks and Shares ISAs, and they offer the same tax-efficient benefits as adult ISAs. Children can manage their Junior ISA from age 16 and withdraw the money from age 18.
You can’t carry forward any unused ISA allowance so if you don’t use it by 5 April, you lose it.
Please note: The value of your investment 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.
2. Use your Marriage Allowance
The Marriage Allowance is a useful tax break that allows you to give some of your Personal Allowance to your spouse or civil partner.
If you or your spouse or partner has an income below the Personal Allowance (£12,500 for most people in the 2020/21 tax year), the person on the lower income can pass up to £1,250 of their Personal Allowance to the other, effectively increasing their Personal Allowance to £13,750. It’s a step that saves up to £250 in Income Tax.
To be eligible:
- You must be married or in a civil partnership
- The partner with the higher income must pay Income Tax at the basic rate in England and Wales, usually meaning their income is between £12,501 and £50,000. In Scotland, they must pay the starter, basic or intermediate rate of Income Tax, usually meaning their income is between £12,501 and £43,430.
Note that the Marriage Allowance can be backdated for up to four years, so you won’t lose the 2020/21 allowance at the start of the new tax year.
3. Maximise your pension contributions
The tax relief on pension contributions makes them one of the most effective ways to save for your future. However, the Annual Allowance limits how much you can contribute to your pension and still benefit from tax relief.
In the 2020/21 tax year, most people have an Annual Allowance of £40,000 or 100% of their earnings, whichever is lower. Your own Annual Allowance could be lower than this if you’re a high earner (with adjusted income above £240,000) or if you have already started flexibly accessing your pension savings.
Maximising your pension contributions before 5 April ensures that you benefit from as much tax relief as is available, so now is the time to make the most of your allowance.
Note that any unused pension Annual Allowance can be carried forward for up to three tax years. 5 April 2021 is therefore your last chance to make full use of your allowance from the 2017/18 tax year.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
4. Make gifts
Making gifts is one of the ways that you can reduce any potential Inheritance Tax (IHT) liability. While it is possible that many gifts could fall outside your estate if you survive for seven years after making them, there are certain exemptions which result in a gift immediately becoming exempt from IHT:
- A £3,000 annual exemption – each individual can gift £3,000 in the 2020/21 tax year and this gift will fall outside your estate for IHT purposes straight away. This can be carried forward for one year, so if you didn’t use your exemption in 2019/20 then you can gift £6,000 before 5 April 2021
- Small gifts of up to £250 – you can make as many gifts of up to £250 as you wish, as long as these don’t go to someone who already received your £3,000 annual exempted gift
- Gifts from income – you can make regular gifts from income as long as they are from your normal expenditure, are from income not capital, and allow you to maintain your normal standard of living. This exemption can require careful planning, so it can pay to work with a financial adviser if you want to make such gifts.
Remember that the £3,000 annual exemption is for an individual, so couples could gift up to £6,000 (£12,000 if you did not use your 2019/20 exemption) before 5 April 2021.
Please note: The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
5. Crystallise gains and use your Capital Gains Tax exemption
You pay Capital Gains Tax (CGT) when you sell certain assets and make a profit. Examples of such assets include stocks that aren’t held in an ISA, a second property, or personal possessions worth more than £6,000 (excluding your car).
In the 2020/21 tax year, each individual has a £12,300 CGT allowance. This means you can make profits up to £12,300 before tax is due. So, it can pay to crystallise gains up to your annual exemption, and spreading out the disposal of assets across several tax years can help you to reduce CGT liability.
Again, working with a financial adviser can help you to make the most of your exemption.
If you make capital gains in excess of your allowance, your rate of CGT will depend on other taxable income:
- Basic rate: 18% on residential property, 10% on other assets
- Higher or additional rate: 28% on residential property, 20% on other assets.
The Capital Gains Tax allowance cannot be carried forward, so it can benefit you to use it before 5 April.
Get in touch
If you want to maximise your 2020/21 tax allowances and exemptions, now is the time to act. Please get in touch via email firstname.lastname@example.org or call us on 01454 416653.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.