Your complete guide to 2020/21 allowances and exemptions

In recent weeks, our way of life has changed dramatically. It’s only been a month or so since the lockdown was imposed, but with schools and businesses closed and an expected hit to the economy of up to 35% of GDP, it’s been a worrying time for many.

The lockdown may have given you the opportunity to reflect on what really matters in your life. Maybe you’ve finally got round to tidying up the garden? Spent more quality time with your family? Or perhaps you’ve found yourself with enough time to sort out those little admin jobs?

Going back to basics can sometimes be helpful. From a financial point of view, the fact that we are now in a new tax year has flown very much under the radar. While your priorities may be elsewhere at this time, the financial world keeps turning and so here’s your complete guide to your allowances and exemptions in the 2020/21 tax year.

Use your new pension allowances

There were few changes to pensions allowances announced in this year’s Budget, and so the pensions Annual Allowance remains at £40,000 in the 2020/21 tax year. This allows you to pay up to £40,000 (or 100% of your earnings if this is lower) into your pension in the 2020/21 tax year and retain tax relief.

The one significant change the Chancellor did make in his first Budget was to the rules regarding the Tapered Annual Allowance. The ‘threshold’ and ‘adjusted’ income levels for the taper to apply were increased by £90,000, to £200,000 and £240,000 respectively.

Now, if you earn an ‘adjusted income’ above £240,000 you will lose £1 of your Annual Allowance for every £2 of income above this threshold. In addition, the allowance now tapers to £4,000 (previously £10,000) meaning very high earners will see the amount they can pay into their pension and retain tax relief fall to just £4,000 per year.

The Lifetime Allowance has been increased in line with inflation and now stands at £1,073,100.

Now we’re in a new tax year you can begin to utilise your pension allowances. If you need advice concerning the various pension allowances and any that may apply to you, we can help. Please get in touch for a chat.

New ISA allowances

There were no changes to the adult ISA allowance during the Budget, and so the subscription limit remains at £20,000 for 2020/21.

The start of a new tax year is an ideal opportunity to top-up your ISA. Investing now gives your money the potential of a full year of tax-efficient growth, rather than waiting for the deadline for contributions at the end of the tax year in March or April 2021.

Now we’re in a new tax year, it’s the perfect time to top-up your ISA. And, the start of the new tax year represents a great opportunity to maximise your returns, as investing in April gives your savings/investments more time to potentially grow tax-efficiently than waiting until the deadline for contributions in March or April 2021.

While the adult ISA limit remains the same in 2020/21, the Junior ISA and Child Trust Fund limit has been significantly increased, from £4,368 to £9,000.

This means that you can now contribute up to £9,000 into a tax-efficient savings vehicle for your child or grandchild.

Note that 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.

Tax and National Insurance allowances in 2020/21

There have been relatively few changes to tax or National Insurance allowances for the 2020/21 tax year.

Income Tax

The Personal Allowance remains unchanged at £12,500 and the Income Tax bands are:

• Basic rate tax (20%) on taxable earnings between £12,500 and £50,000
• Higher rate tax (40%) on taxable earnings from £50,000 to £150,000
• Additional rate tax (45%) on taxable earnings over £150,000.

Your Personal Allowance is reduced by £1 for every £2 earned over £100,000. If you earn £125,000 or more, you’ll have no Personal Allowance.

National Insurance Contributions

Fulfilling a manifesto commitment, the Chancellor increased the threshold for paying National Insurance Contributions from £8,632 to £9,500 from 2020/21. The government estimates the average employee should be around £104 better off.

Employees will now pay Class 1 National Insurance Contributions at a rate of 12% for earnings between £184 and £962 a week (£9,500 to £50,000 a year). An extra 2% is applied on earnings above this threshold.

Self-employed workers who earn over £6,365 a year, will pay Class 2 NICs at a flat rate of £3.05 per week. If you are self-employed and you earn over £9,500 a year, you will pay Class 4 contributions of 9% of profits between £9,500 and £50,000 per year, plus 2% of any earnings above that.

Dividend Tax

The tax-free dividend allowance remains at £2,000 for the 2020/21 tax year. The tax rate for dividends above £2,000 depends on your tax bracket:

• Basic rate taxpayers – 7.5%
• Higher rate taxpayers – 32.5%
• Additional rate taxpayers – 38.1%

Capital Gains Tax

The Capital Gains Tax (CGT) exemption has risen slightly in the 2020/21 tax year, to £12,300. Now we are in a new tax year you can use your annual CGT exemption.

There have been no changes to the CGT rates, which remain at:

• Basic rate taxpayers – 10% (18% for second/Buy to Let properties)
• Higher and Additional rate taxpayers – 20% (28% for second/Buy to Let properties)

The Chancellor did announce a change to Entrepreneurs’ Relief in the Budget. The lifetime limit on gains that an individual can make that are eligible for Entrepreneurs’ Relief has reduced from £10 million to £1 million. Larger businesses or those realising significant gains on disposals will, therefore, pay more tax.

Inheritance tax

Despite suggestions that the Chancellor would reform Inheritance Tax, there were no significant changes in the Budget. Inheritance tax (IHT) remains payable at the rate of 40% if the value of your estate exceeds the nil rate band (NRB), which is £325,000.

The Residence Nil Rate Band (RNRB) has risen to £175,000 in the 2020/21 tax year, meaning you can benefit from an additional £175,000 in tax-free allowance if you’re passing your home to a direct descendant.

As we are now in a new tax year, you can utilise your annual gift exemption of £3,000.

Time for a review?

The start of a new tax year is a great time for a financial review. This may be particularly relevant during this period if you are worried about your personal or business finances, or concerned about market volatility (we have written more about that here).

Whether you’re an existing client, or you feel you would benefit from a financial review, please get in touch. Email enquiries@blackswanfp.co.uk or call 020 3828 8100.

Please note

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.