Tax Allowances and Exemptions 2020/21

I imagine that the new tax year probably isn’t foremost in people’s minds at the moment. In fact, I very much suspect it has passed by entirely unnoticed in light of recent events. But, early use of the new tax year’s allowance and exemptions can really help people out in the long term. So, for the briefest of moments, we wanted to look away from the immediate concerns of today to think a little about the future.

Thinking long-term today may seem a little futile. But, these days, along with their current crisis, will pass. And so knowing about, and making early use of, the investing tax breaks available, will put you in a stronger position when that time comes. 

So, below is a brief recap of the main allowances and exemptions from the last Budget:

Income Tax

The personal allowance, the higher-rate threshold, and the additional rate band remain unchanged.

So, the personal allowance continues to be set at £12,500. The point at which you would start to pay higher-rate Income Tax remains £50,000, and the additional rate band stays put at £150,000. 

We should note here that there are some changes to the tax bands for Scottish taxpayers. These are detailed on HMRC’s website.

Dividend and savings income

The Personal Savings Allowance continues to allow basic rate taxpayers to earn £1000 of interest on savings before incurring tax in 2020/21. Meanwhile, those paying tax at the higher rate will continue to see an allowance of £500, while there is no allowance for additional rate taxpayers.

The Dividend Allowance also stays unchanged at £2,000. To remind ourselves, the tax rate on dividends above the allowance looks as follows:

 

Tax Band Tax rate on dividends above the allowance
Basic 7.5%
Higher 32.5%
Additional 38.1%

 

Personal pensions

There had been hopes over possible changes to pension tax relief with this Budget. However, nothing was forthcoming as the government, in the wake of the Coronavirus outbreak, probably decided now was not the best time to review.

So, most people can still enjoy tax relief on pension contributions up to £40,000 per tax year (or 100% of earnings, if less). This annual allowance is still reduced for some earners, but the threshold for this has increased, probably in response to those who have faced large tax bills on extra pay. 

The annual allowance will now only begin to taper down for those who have an adjusted income above £240,000. Previously this had been set at £150,000. Individuals with adjusted income under £240,000 will not be subject to the taper. Instead, they will have a £40,000 annual allowance.

This being said, the minimum that the annual allowance can taper down to will now be £4,000. It had previously been set at £10,000.

The lifetime allowance also saw an increase of £18,100. This means that as of 6th April, you can now have up to £1,073,100 in your pension pot before incurring a tax charge.  

Capital Gains Tax

The Capital Gains Tax annual exemption has also seen an increase for individuals. It is now up from £12,000 to £12,300. For those of you in any doubt, repeated use of your CGT exemption offers a good way of transferring assets into ISAs or pensions to protect you from any future tax liability on income or gains.

ISAs

There were no changes to the amount you can put into your ISA for 2020/21. The most you can put in remains £20,000, including Stocks & Shares and Cash ISAs. We should mention here though that the prospects for Cash ISA savers have changed dramatically. Recent cuts in interest rates have seen levels fall to the lowest on record.

It is also likely that savings rates will remain low for the foreseeable future. The current market volatility can make would-be investors nervous. However, investing in stocks and shares will likely remain the best long-term option for ISA savers.

Junior ISAs

There was good news on the Junior ISA front as the budget announced more than doubling its annual allowance to £9,000. For those looking to give children a solid financial headstart, Junior ISAs (and pensions) are definitely well worth considering. Currently though, around 57% of Junior ISAs are held in cash – something parents might wish to review given the interest rate outlook.

Inheritance Tax

The Inheritance Tax nil-rate band has been frozen for the last decade. This is set to continue for 2020/21 as it remains at £325,000. Meanwhile, the residence nil-rate band has increased to £175,000.

 Prior to the Coronavirus outbreak, the government had been working on plans to simplify the IHT regime. These were prudently put on hold as the virus escalated, but it does remain firmly on the agenda. So, those thinking about making lifetime gifts might then wish to do so sooner rather than later. The tax rules will be ‘simplified’ into something potentially less generous once those government plans are realised.

Entrepreneurs’ Relief

This wasn’t scrapped altogether, but almost! The Chancellor cut the tax break available when people sell their businesses by 90%! So as of April, Business sellers will now pay 10% on lifetime gains of up to £1 million. It’s a stark difference compared to the previous upper limit of £10 million. Meanwhile, Standard Capital Gains Tax rates apply for gains over £1 million, which is 20% for higher rate taxpayers.

 

If you would like any further information on this tax year’s allowances and exemptions, we would love to help. Our advisers are available on 01243 767 469. Alternatively, you can email us from our contact page, and we will get in touch!

Written by Ian Barnett

Ian is an experienced Chartered Financial Planner as well as being a Fellow of the Personal Finance Society, with over 25 years’ experience in the financial services industry.  With a broad range of client experience and expertise, Ian specialises in financial matters from Pre-Retirement Planning to Inheritance Tax Planning and all points in between.