YOUR 2021/22 TAX ALLOWANCES: WHY YOU SHOULDN’T WAIT UNTIL MARCH TO MAKE THE MOST OF THEM
The temptation to wait until the end of the tax year to check you’re using your various allowances is one that should be resisted. Taking time to review your tax allowances during the tax year can prevent last-minute panic and ensure that opportunities aren’t missed. Rumours often swirl about potential changes to tax allowances, particularly around pensions, but they rarely prove accurate. Base your plans on what you know.
If you’ve ever left it as late as possible to meet a deadline, you’ll know what it feels like. You likely felt anxious and stressed, before experiencing the relief of (hopefully) getting your job done in time. You may also have had a rush of adrenalin, which could help explain why this is a favoured approach to getting things done.
Waiting until the last minute can easily become a habit – but it can also come with a cost where financial deadlines are concerned. The end of the tax year on 5 April – the point by which your annual allowances must be used – is the date that many of us use as a deadline for sorting out our finances and getting our tax affairs in order. But while that makes sense, it can also be a mistake.
Taking a different approach
As with any form of deadline cramming, leaving the task until the clock is ticking down invariably results in it being rushed and opportunities missed.
“The deadline is there for the allowances to be used, but it’s just a deadline – you have a whole year to use them,” says Tony Clark, Senior Propositions Manager at St. James's Place Wealth Management. “If you do it during the tax year, you can take your time to assess the actions you need to take.”
The obvious solution is to plan much further ahead. Checking your tax allowances earlier in the tax year – either as a one-off or on a regular basis – not only prevents that end-of-tax-year rush, but also makes sense financially.
“If you leave things too late, you run the risk of missing the deadline,” says Clark. “You can do a proper review and assessment of the allowances you’ve used and where possible bring forward unused allowances from the previous year. If you don’t do that until the end of the year, you might miss that opportunity.”
Make allowances for time
In investment-based tax planning, for instance, the extra time provides the potential for you to benefit fully from your money being invested tax-efficiently and using all your allowance.
Similarly, anyone who is self-employed and planning for retirement can easily run out of time to put a lump sum into their pension before the end of the tax year, given everything else that may need addressing.
For example, if you are able to pay in more than the current annual pension allowance – frozen in recent years at £40,000 – you can carry forward any unused allowance from the previous three years, so make sure you don’t overlook this.
Business owners especially can benefit from getting ahead rather than waiting until the deadline approaches, according to Clark. “There’s a whole raft of allowances to consider, and you’ve got two lots of tax planning to think about; your personal allowances, as well as those that apply to your business, and it can be a lot to go through if you’re short on time.”
Taking allowances at face value
Rumours of changes to tax allowances are commonplace, especially when it comes to pension tax relief. As it stands, however, there’s no clear indication of any changes that might be introduced with the next tax year, says Clark.
“If anything, the government could possibly freeze some of the reliefs and allowances that we often see increased.”
But he cautions against acting before anything is officially announced.
“The best thing you can do is base your tax planning on the existing rules and do it regularly,” says Clark.
“Regular contact with your adviser is the key, even if the right course of action is to change nothing. As soon as you become aware of any potential changes, speak to your adviser to work out any actions you might need to take.”
Rules and allowances for the 2021/22 tax year
- The first £12,570 of your earnings are tax free.
- You pay 20% tax on everything between that and the higher-rate threshold of £50,270.
- Everything between £50,271 and £150,000 is taxed at the higher rate, which is 40%.
- Everything above £150,000 is taxed at the additional rate of 45%.
Individual Savings Account (ISAs)
- Your annual ISA allowance is £20,000. You can save up to this amount in either a Stocks & Shares ISA or a Cash ISA (or a combination of the two) during this tax year without paying any tax on the interest or profits.
- This limit is per person, so you and your spouse or partner can have one each.
- If there are any children in your life, you can also save up to £9,000 per year in a Junior ISA on their behalf.
Personal Savings Allowance
- You can earn interest of up to £1,000 this tax year if you pay Income Tax at the basic rate.
- If you pay higher-rate Income Tax, the limit is £500. There’s no allowance for additional-rate Income Tax payers.
- The first £2,000 you earn in dividends is tax free.
- You then pay 7.5% on anything above that if you pay Income Tax at the basic rate or no Income Tax at all.
- If you pay Income Tax at the higher rate, it’s 32.5%, while at the additional rate it’s 38.1%.
- If your stocks and shares are held in an ISA or pension, any dividends you earn from them are tax free.
Capital Gains Tax (CGT)
- The first £12,300 of any capital gains you make is tax free.
- Basic-rate Income Tax payers are liable to pay 10% on anything above that threshold, while if you pay higher rate Income Tax, it’s 20%.
- Profits from property (if it’s not your main residence) are charged at 18% (basic rate) and 28% (higher rate).
- Corporation Tax is currently charged at 19% on profits for all businesses.
- In April 2023, this will rise to 25% for businesses with profits of £250,000 and above.
- For businesses with profits of £50,000 and less, the rate will remain unchanged at 19%.
- For those in between, the tax rate will be tapered.
- Anything you pass on to your spouse or civil partner when you die is usually tax free.
- The first £325,000 of your estate is tax free, but anything above this is charged at 40%.
- If your home is included in your estate, the tax-free threshold increases up to £500,000 (as long as you’re passing the home to a child or grandchild and your total estate is worth less than £2 million).
- Your tax-free allowance can be passed on to your spouse or civil partner – so when they die, the allowances can be combined.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA. The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.