The Tax Year is over, long live the Tax Year!
With the end of the tax year over the Financial Planning community breath a collective sigh of relief. Gone are the days of rushing around client offices getting signatures on paperwork or delivering cheques to provider offices and it certainly doesn’t have the glitz, glamour and excitement of Transfer Deadline day, there is no Harry Redknapp leaning out of his car window talking about opportunities for Bed and ISA or that last gasp Pension contribution boosting his retirement hopes.
What it does have in common with the football transfer window though is that very few people seem to take action early doors. It doesn’t matter how early we start talking to clients about ISAs and Pension there does seem to be a tendency to leave things to the last minute.
So we thought we would give your our 3 top tips to get ahead of the game this tax year along with a rundown of the new allowances and rules worth knowing about.
1. Get in early
Early use of the new tax year’s allowances and exemptions could reap rewards over the long term for many reasons. Aside from your Financial Planner loving you for taking action early you will also benefit from more Time In The Markets. Time is our greatest ally in investing, it rewards over and over again and of course money in your ISA or Pension is growing tax efficiently so you are keeping more of your wealth each time.
We have many clients with General Investment Accounts (GIAs) which are like an ISA overflow. At this time of year, we are moving funds across from their GIAs to their ISAs (and sometimes pensions too) as part of our service to them. This has so many benefits from extra time in the markets to maximising ISA allowances and getting that growth tax-efficient early doors.
2. Automate your savings
There are two key automations we use to help our clients. Firstly we make saving automatic. Where appropriate we put savings on monthly direct debits as this reduces decision-making points and concerns about timing the markets. Instead of analysis paralysis taking over when putting a lump in at the end of the tax year our clients are saving monthly in ISAs, Pensions and GIAs. The other benefit of this is called Pound Cost Averaging. This is where you are buying into the market regularly and therefore capturing an average market price over time. Most of the benefits of this a psychological rather than financial as markets rise have tended to rise in 59% of months over the past 20 years but the psychological benefit of knowing you are not buying in at a peak in the market is very valuable.
3. Turn up the dial
So what if you are already saving monthly into your Pension and/or ISA?
Inflation means that what you were putting in last year is not worth the same as it is this year. Your Savings Rate is the percentage of your income that you are saving or investing each month. By increasing that amount each year you can significantly improve your results. If you invest £250 per month over 20 years and get a 5% return after charges you will have a return of £102,758. If instead you increased your savings but 2.5% each year to rise with inflation you will instead have £125,025. A whopping 25% increase in your total return.
So why not crank up your savings this tax year, move the dial and accelerate your path to achieving your goals.
And so onto the all-important thresholds, rates and more.
The personal allowance – 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.
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|
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.
Ahead of the Budget, there had been considerable speculation over possible changes to pensions tax relief, but nothing was forthcoming; the government perhaps deciding that, given the impact of coronavirus, 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.
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.
The ISA subscription allowance 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.
The Junior ISA annual subscription allowance also 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 cash¹: something parents should perhaps reconsider given the interest rate outlook.
The Inheritance Tax 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.
The government continued to put on hold plans to simplify the IHT regime, but it 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.
The main rate of corporation tax will remain at 19% for the year beginning 1 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.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances. These are correct as at 6th April 2021
1 HMRC, Individual Savings Account (ISA) Statistics, June 2020