2020/21 Tax Year Allowances
As we enter the 2020/21 tax year, we thought it would be useful to provide a summary of the main tax allowances available to individuals.
Personal Allowance – £12,500
The personal allowance is the amount of income you do not have to pay tax on. There has been no change in the personal allowance from the 2019/20 tax year.
It is worth remembering that your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means that the allowance is completely lost when your adjusted net income is £125,000 or above.
Any income above £12,500 is taxed depending on which tax band it falls into; these rates are summarised in the table below:
|Tax Band||Taxable Income||Tax Rate|
|Personal Allowance||Up to £12,500||0%|
|Basic Rate||£12,501 to £50,000||20%|
|Higher Rate||£50,001 to £150,000||40%|
|Additional Rate||Over £150,000||45%|
Dividend Allowance – £2,000
The dividend allowance is the amount of dividend income you do not have to pay tax on. There has been no change to the dividend allowance from the 2019/20 tax year.
Any dividend income received above the £2,000 allowance is taxed depending on your income tax band, the different rates are summarised in the table below:
|Tax Band||Tax rate on dividends over the allowance|
Capital Gains Tax Allowance – £12,300
Capital Gains Tax (CGT) is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. You only have to pay tax on gains which are above the CGT allowance (annual exempt amount). The CGT allowance has increased by £300 from the 2019/20 tax year.
Any gains realised over the CGT allowance are taxed at a rate depending on your tax band:
|Tax Band||Tax rate on gains over the allowance|
|Higher/ Additional Rate||20%*|
* The rate is increased by 8% on gains on disposals of residential property.
Individual Savings Accounts (ISAs)
An ISA is a saving or investment account which benefits from certain tax exemptions which include:
ISAs remain one of the most tax-efficient wrappers which is why there is a restriction on the amount you can pay into them in a tax year. The annual allowance for total contributions across all types of ISA is £20,000. There are different types of ISA which have their own restrictions on how much can be paid into them in a tax year. These limits are summarised below:
There has been no change to the Cash ISA and Stocks & Shares ISA allowances from the 2019/20 tax year.
The Junior ISA allowance has increased significantly from £4,368 to £9,000 in the 2020/21 tax year.
There has been no change to the Lifetime ISA allowance from the 2019/20 tax year.
The annual pension allowance remains unchanged at the lower of £40,000 gross (£32,000 net) or the level of earned income. For those with no earned income (including children), the maximum annual contributions remain unchanged at £3,600 gross (£2,880 net).
In the 2019/20 tax year the annual pension allowance was tapered down for those earning more than £110,000 down to £10,000. In the 2020/21 tax year the income threshold at which tax relief on pension contributions starts to reduce will rise from £110,000 to £200,000. This is a major positive for those earning between £150,000 – £240,000 p.a. as their scope for pension contributions will have increased.
However, there has also been a decrease in the minimum tapered annual allowance from £10,000 to £4,000. This means that those earning above £300,000 would begin to see their annual allowance reduce from £10,000 to £4,000.
The calculation of the tapered allowance for higher earners is complicated. We have previously released a blog post, here, focussing on the rule in more detail. We are also looking to produce an update to this post based on the 2020/21 tax year. If you do have any questions, you should contact your adviser.
Pensions remain an attractive option for investors, with tax relief being able to be achieved at your highest marginal rate on any personal contributions, and companies being able to classify employer contributions as business expenses. In addition, under current legislation most pensions are not included as part of your estate when being assessed for Inheritance Tax (IHT).
The aim of this blog is to highlight the allowances available to individuals now that we have entered the 2020/21 tax year. If you have any questions at all then you should contact your adviser.
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. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Tax Advice.