As we approach the new tax year, it’s time to look at the tax changes for 2021/22 and how you can better organise your finances and maximise your savings in the year ahead. Here we will be sharing our top planning tips to help you make the most out of every penny.
At the start of March, Chancellor Rishi Sunak announced the Budget 2021. There were minimal changes to policy, but instead, he introduced a freeze on many of the tax allowances in a bid to help repair the nation’s finances.
So, although frozen, let’s recap on the tax allowances available to utilise.
Tax planning allowances for 2021/22
Each year you get a new set of allowances that attract certain tax perks.
As of 6th April 2021, you’ll have:
- A new £20,000 ISA allowance
- A £40,000 pension annual allowance (subject to criteria and restrictions)
- A Junior ISA/Child Trust Fund allowance of £9,000 for each of your children
- A personal allowance of £12,570 (subject to reduction if earning over £100,000)
- A dividend allowance of £2,000
- A personal savings allowance of between £500-£1,000 for basic and higher rate taxpayers
- A capital gains tax allowance of £12,300 for individuals – remaining at this level until 2026
Other allowances over your lifetime:
- An inheritance tax allowance of £325,00 (plus an extra £175,000 if you pass on your property to a direct descendant) – remaining at this level until 2026
- Pension Lifetime Allowance of £1,073,100 – remaining the same until 2026
Your 2021/22 savings strategy
Have you picked up any good savings habits over the past twelve months? Maybe you’ve been able to save a significant amount over lockdown, and you’re not sure how to maximise it while interest rates are still so low. We have a list of actions you can take this year to better your financial position in the future.
Reassess your priorities
If you have saved more than usual, then now’s the time to think about where you’re best investing this surplus cash. What do you want to do and see when we get back to some normality?
Budget for any big spending
If you want to move house, buy a car, go on your dream holiday, pretty much anything that would set your savings back somewhat, then you should be planning for this and integrating it into your financial plan.
Keep the future in mind
As much as we fully support doing the things that make you happy, we encourage you to keep your bigger goals in mind. If you’ve managed to save well while in lockdown, you could be well on your way to reaching some of your milestones.
But, don’t forget to life is for living
On the flip side of this, life is for living and not always for saving. Look at where you’re spending your money now and try to reduce or eliminate any unnecessary expenditure so that you have that extra bit of leeway to do more of the things that make you happy.
However, make sure what you have is enough for your later years too. It’s great to live life to its fullest, but safe in the knowledge you have enough; this is one of the great benefits of cashflow modelling.
Key tax planning areas
Your pension pot is one of the most tax-efficient savings accounts, but are you making the most of their benefits?
If you’re a higher rate taxpayer or likely to fall into that bracket in the future (given the news of the income tax threshold freeze), then saving more into your pension could mitigate any impact of the freeze.
You can pay up to £40,000 per year. However, tax relief might not always apply.
If you are under 75, tax relief is available on the greater of:
- A gross contribution of £3,600 or
- 100% of your earnings, subject to the annual allowance.
If your earnings go above a certain level, or you have accessed benefits from your pension, you may have a reduced annual allowance.
Another way to save tax-efficiently is into an Individual Savings Account (ISA).
Although saving into a regular savings account is all good and well, you may be liable to pay tax on the interest if you exceed the personal savings allowance. Yet, the money you save into an ISA will grow tax-free.
The £20,000 annual ISA allowance can be split across various types of ISAs.
Is one of your goals to help give your children or grandchildren a head start when they make their first steps to become financially independent?
You can save up to £9,000 a year into a Junior ISA (JISA) for each of your children (or grandchildren)
A couple of things to note here:
- If your child or grandchild is 16 or 17, they are entitled to two ISA allowances. The first being the general £20,000 ISA allowance for adults, and the second being the £9,000 Junior ISA allowance.
- Anyone with a Child Trust Fund can transfer this cash into a JISA. To help you decide whether this is the right move for you, MoneySavingExpert has published a helpful Child Trust Fund
It’s never easy to talk about inheritance. However, the sooner you start planning for the long-term future, the more you and your loved ones can enjoy the experiences your money enables you to have now.
There is a range of ways you can minimise inheritance tax (IHT) for your loved ones. However, thinking specifically about how you can incorporate IHT planning into your tax planning strategy for 2021/22, it’s all about making the most of gifts and exemptions.
To sum, exemptions may include:
- An annual “gift allowance” of £3,000
- Charitable giving (i.e. to charities, museums, amateur sports clubs, universities or political parties)
- Wedding gifts (up to £5,000 for a child, £2,500 for a grandchild or £1,000 for a friend or other relative)
- Gifts to help with living costs
- Potentially Exempt Transfers (PETs) – Gifts of any value start a 7-year clock, and if you survive the gifts by those seven years, they’ll be exempt from IHT
The IHT threshold, also known as the nil rate band, is £325,000, plus an additional £175,000 residence nil rate band if you’re leaving the property or the sale proceeds of a property to a direct descendant. Anything that exceeds this amount attracts a tax of 40%.
Capital gains tax
Capital gains tax (CGT) is a tax on the profit made from selling or ‘disposing of’ different types of assets, including stock investments, property and real estate. It’s the total sale price – the original cost of an asset. However, you will only be required to pay this fee if your gains are more than the tax-free allowance of £12,300 for 2020/21 and 2021/22.
If CGT is a concern for you and you would like to reduce your liability, here are some planning tips ahead to reduce or even eliminate CGT:
- Transferring assets between spouses is currently exempt from CGT
- Gifts to Charity are free from CGT
- Any gains or losses held in an ISA or pension are exempt from CGT
- If you sell some assets at a loss, your losses with be deducted from other gains within the tax year
If you’re unsure as to anything tax-related, there are various tools and calculators to help you work out the tax due.
We know that tax planning is complex and often requires a second pair of eyes. As financial planners, we not only offer this but a safe pair of hands.
If you have any tax planning or other questions, then please don’t hesitate to get in touch and speak to one of our professional financial planners.
Please note – the information in this article does not constitute advice and is for information purposes only. We suggest you seek advice before making any financial decisions, especially tax-related.