Maximising Allowances

Everyone has the right to receive a certain amount of income before being required to pay tax on it.

There are three main income tax allowances: (all figures are correct for the 2021/2022 tax year)

• Personal Allowance: £12,570 (and covers income from all sources)
• Dividend Allowance: £2,000 (from dividends only and can be used in addition to your

Personal Allowance. This is a useful allowance for business owners)

• Personal Savings Allowance: £1,000 for basic rate taxpayers / £500 for higher rate taxpayers / £Nil

for additional rate taxpayers (for interest from cash savings and fixed interest investments)

An important point of note is that, if your income exceeds £100,000, then you’re not eligible to receive the full Personal Allowance. Instead, the allowance is reduced by £1 for every £2 of income received above the £100,000 limit. This effectively increases your income tax rate. However, some of the impact of this may be reduced by making a pension contribution.

Contributing to your pension, reduces the income amount used to calculate your personal allowance. Where this is done as part of your retirement plan, this means that more of your money is staying with you and going towards your future.

Also, it is worth considering holding some of your income producing investments in an ISA wrapper (up to the limits available) which will then make them free from income, capital gains and dividend tax.

This is the tax payable when you sell an asset that has increased in value and is often referred to as ‘CGT’. Assets could be anything from a second home to shares, jewellery to antiques and even art.

Everyone is entitled to an amount of ‘profit’ that is exempt from this tax. The CGT exemption for the 2021/2022 tax year is £12,300. Any amount made above this sum is taxable at a rate dependent on the level of income tax you pay:

Basic rate taxpayers: 10% or 18% for property

Higher rate taxpayers: 20% or 28% for property

This exemption is an example of ‘use it or lose it’ as it can’t be carried forward to future tax years if it’s not fully utilised in a previous year. It therefore becomes important to consider how you may wish to stagger disposals of assets across a number of years if at all possible in order to be more tax efficient.

Another point of note is the exemptions available on transfers between spouses. If you are married or in a civil partnership, you have the opportunity effectively to double the CGT exemption available to you by passing assets between partners. If you are thinking about this, please note that it can be somewhat complex and may require specialist advice and the transfer must be genuine and an unconditional gift from one partner to the other.

ISAs, or Individual Savings Accounts, have been available since 1999 and provide a tax efficient way to save by shielding your money from any further Income Tax (the tax on any sources of income you may have) or Capital Gains Tax (the tax on any profit made when you sell an asset).

Despite the many benefits that ISAs provide, there is a restriction on the amount you can save / invest called the Annual ISA Allowance. This is set at £20,000 per year (correct for the 2021/2022 tax year). This means that you can top up your ISA at any point during the year so long as the total amount saved or invested does not exceed £20,000 in that tax year.

The allowance is reset on 6th April every year and you are then able to save an additional £20,000 in that following tax year and in every tax year after that. You cannot carry forward any unused ISA allowance to future tax years so it’s important to utilise your allowance on or before 5th April each year.

For more information about the types of ISA available, take a look at our ISA pages or contact us to learn more.

Alternatively, you may wish to Find An Adviser near you who would be more than happy to answer your questions and discuss your options, or else you can Request A Call Back and we will be happy to contact you.

Pensions are a tax efficient way to save for your retirement due to the income tax relief that you get on the money that you pay into your pot. This means that, when you save into your pension, the tax that would normally be paid to government goes towards your pension instead.

The Annual Allowance for pension contributions is £40,000 and takes into account contributions from all sources, including yourself, your employer, and HMRC.

There are different contribution rules for those that are earning over £240,000. If you believe that you may be impacted by Tapered Allowance, please Get In Touch and one of our advisers will be able to help you based on your specific circumstances and the impact this will have on your individual plans.

Another restriction of pensions is the total amount that you can save up in your pension pot whilst still receiving the full tax benefits available. This restriction is called the Lifetime Allowance and sets a limit on the amount saved without triggering a tax charge. The Lifetime Allowance is currently £1,073,100 and is likely to remain frozen at that amount until April 2026.

For more information on Pensions, please have a look at our Retirement Planning, Get In Touch or Find An Adviser pages and we will be happy to talk about your personal situation in more detail.

Owning stocks and share is a great way to grow your money and often they provide an income too in the form of a dividend. If the stocks and shares that you own are not held within an ISA, it can mean that the dividends they create can be liable to dividend tax.

As with all the other taxes, there is a tax-free allowance which, in this case, is on the first £2,000 worth of dividends that you receive.

To calculate your tax liability, you will need to add your dividend income to all other income that you have. When you deduct your Personal Allowance, this will tell you if you are in the band for basic rate, higher rate, or additional rate tax. On the dividend element, you’ll pay:

• nothing on the first £2,000 of dividends,
• 7.5% if you pay at a basic rate,
• 32.5% if you pay at the higher rate, and
• 38.1% if you pay at the additional rate

From 6th April 2022, Dividend Tax is set to increase by 1.25% across the board, which makes it even more worth your while to hold your stocks and share in an ISA if you can.

For that reason, and to maximise your allowances,

• make sure you’ve maximised the use of your ISA allowance for this tax year before tax year end on 5th April, and
• if you are a company director and pay yourself using dividends from the business, it could make sense to take a bigger dividend before 5th April 2022 – the end of the tax year – before the tax rate increases.

For more information on ISAs, take a look at our ISA page or Get In Touch to speak with one of our advisers about your options and how to maximise your allowance to create a tax efficient financial plan.

One of the most rewarding things that you can do is to give money to a charity, either as a gift or as part of your estate. Not only does this ensure that we can continue to good for others, but it is also recognised and encouraged by the government through tax reliefs.

A gift from taxable income is great for a charity in and of itself but they are also able to claim basic rate tax on the value of the gift.

If you are a higher or additional rate taxpayer, you can reclaim the additional tax relief. This is 20% for higher rate and 25% for additional rate. So, for every £8 you donate, the charity would be able to benefit by £10 and a higher rate taxpayer could then claim an additional £2 of tax relief on the gross donation, which effectively reduces the cost of the gift to £6.

In addition to this, gifts of assets such as shares or property will not incur capital gains tax on the sale of the asset, nor will the gift itself be subject to inheritance tax.