Spring forward: Getting into gear for the new tax year

The 2021/22 tax year started on 5th April 2021. Early use of the fresh allowances and exemptions could reap rewards over the longer term – but what are the key areas to think about?

As we ease out of lockdown and the vaccine rollout continues, the start of a new tax year on Monday may have flown under the radar. However, we can and should turn our attention to the important longer-term matters, as making early use of the investment tax breaks available offers the potential to put you in a better position when markets do eventually recover.

New data released by St. James’s Place in March indicates that COVID-19 has meant Brits are taking their goals more seriously than before, having used the last 12 months to reassess what’s important to them, and now know what they want. Now’s the time to put that focus into action!

Being a tax-year early bird

This stronger motivation for making future plans is perhaps a rare silver lining of the pandemic, but it’s important to start taking steps towards that end goal. Spring is therefore a perfect opportunity for financial housekeeping.

Last month’s Budget already feels a very long time ago. However, with potential tax hikes on the horizon, it’s worth making effective use of the shelters that are available for your money, and checking you won’t pay unnecessary tax on any future profits.

Here’s a rundown of the main tax exemptions and allowances, and what has, or hasn’t, changed for the new tax year:

  1. Inheritance Tax

The Inheritance Tax (IHT) nil-rate band for 2021/22 remains at £325,000 and will remain frozen until 2026. The residence nil-rate band stays at £175,000.

On ‘Tax Day’ (23rd March 2021), the government proposed a tidy-up to the paperwork side of IHT, and simplifying the tax itself clearly remains on the agenda. So, now may be a good time to review making lifetime gifts before the tax rules are potentially ‘simplified’ into something less generous. Here are five ways you can defeat IHT.

Talking of future planning, the pandemic has provided a tragic reminder of why it’s so important to ensure that our affairs, including an up-to-date Will, are in order. The Office for Budget Responsibility has forecast a 20% increase in the number of deaths subject to IHT in this tax year1 – making matters worse for many of the families affected, these bills will be unexpected as those who have died from the virus will not have had time to plan their affairs.

  1. Income Tax

The personal allowance – which is the amount that you can earn before you start paying Income Tax – has increased to £12,570. Similarly, the higher rate threshold – the point at which you will start to pay 40% Income Tax – has risen slightly to £37,700 of taxable income or £50,270 of gross income in 2021/22.

Both the personal allowance and the higher rate threshold have been frozen for the next five years. The additional rate tax threshold of £150,000 is unchanged. There are some changes to the tax bands for Scottish taxpayers, which can be found on HMRC’s website.

  1. Personal pensions

Ahead of the Budget, speculation was rife over possible changes to pensions tax relief, but nothing was forthcoming; the government perhaps deciding that now was not the time. Most people can still get tax relief on pension contributions worth up to £40,000 per tax year (or 100% of relevant earnings, if less).

The annual allowance continues to taper down for individuals who have an adjusted income above £240,000 and threshold income in excess of £200,000. Those with adjusted income under £240,000 will not be subject to the taper and will have a £40,000 annual allowance (unless relevant earnings are below £40,000). The minimum that the annual allowance can taper down is £4,000.

The lifetime allowance – the most you are allowed in your pension pot before triggering an extra tax charge – remains the same at £1,073,100 for 2021/22.

  1. Dividend and savings income

Through the Personal Savings Allowance, basic rate taxpayers can continue to earn £1,000 of interest on savings before paying tax in 2021/22. Those paying tax at the higher rate see their allowance remain at £500. The Dividend Allowance has also remained unchanged at £2,000.

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

Both allowances have been frozen since 2018/19, limiting the scope to earn tax-free dividend and savings income, and underlining the importance of making maximum possible use of your ISA allowance.

  1. Capital Gains Tax

The Capital Gains Tax annual exempt amount for individuals will remain at £12,300 until 2026. Effective and repeated use of your CGT annual exempt amount is a great way to transfer assets into ISAs or pensions to provide a shelter from any future tax liability on income or gains.

  1. ISAs

The most you can put into your ISA remains at £20,000 for the 2021/22 tax year. This includes Stocks & Shares and Cash ISAs. What also remains unchanged is the prospects for Cash ISA savers given the continued low interest rates available.

The current volatility in markets can be off-putting, but investing in stocks and shares is likely to remain the best long-term option for ISA savers.

  1. Junior ISAs

Last year brought a big surprise with a more-than-doubling of the Junior ISA annual allowance. This year, however, it remains unchanged at £9,000.

Alongside children’s pensions, Junior ISAs present a great opportunity to help give children a financial head start. Yet according to the latest available figures, nearly three out of four accounts of Junior ISAs are held in cash2: something parents should perhaps reconsider given the interest rate outlook.

  1. Corporation Tax

The main rate of Corporation Tax will remain at 19% for the year beginning 1st April 2021 and will rise to 25% from April 2023 for businesses with profits of £250,000 and over. The rate for businesses with profits of £50,000 or less will remain at 19%, and there will be a marginal taper for profits between £50,000 and £250,000.

Seizing the new opportunities

To summarise, as we take our first tentative steps out of lockdown and focus on the gradual reopening of the country, now’s the time to take action.

With no major changes announced in the Budget or Tax Day, speculation about how the government will seek to recoup the cost of pandemic support will no doubt continue. It’s therefore more important than ever to make the most of the current allowances, and to make sure you’ve got a retirement savings plan in place, your pension is working hard for you and that you know how much a comfortable retirement is going to cost.

If you would like to find out more about the new tax year allowances, please get in touch.

Sources:

1 Office for Budget Responsibility, November 2020
2 HMRC, Individual Savings Account (ISA) Statistics, June 2020

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 or a deposit with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.

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