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08/02/216 tax allowances to use before 5 April 2021 to boost your finances

The current 2020/21 tax year will end on 5 April 2021. As a new tax year starts, many allowances reset. For some, it will be your last opportunity to use them. Using these six allowances before the deadline can help you get the most out of your money.

1. ISA allowance

ISAs are a popular way to save and invest. They are tax-efficient, you do not need to pay Income Tax or Capital Gains Tax on the interest or returns earned. Maximising your ISA contributions to make use of the annual ISA subscription allowance can reduce your tax bill. The current ISA allowance is £20,000 per tax year.

Remember, you can also use a Junior ISA (JISA) to save or invest for a child. Similar to an adult ISA, they are tax-efficient. You can contribute £9,000 per tax year. Money contributed to a JISA is locked away until the child turns 18. Be careful if the child has a Child Trust Fund (CTF) as they aren’t eligible to open a JISA unless they first transfer the CTF funds to a JISA and close the CTF. The CTF was available to children born between 1 September 2002 and 2 January 2011 and was opened by the government if the parent or guardian didn’t open one.

2. Pension annual allowance

The annual allowance is the amount you can pay into a pension each tax year without suffering a tax charge. Tax relief provides an instant boost to your pension savings. As a result, it makes paying into a pension an effective way to save for retirement.

If you are in a position to do so, increasing pension contributions to take advantage of this can significantly increase your pension and income when you retire. Usually, you can personally invest up to 100% of your annual earnings, up to £40,000 less employer contributions, into your pension and still benefit from tax relief. However, if you have already flexibly accessed a pension or are a high-earner, your allowance may be lower. If you have unused annual allowance from the last three tax years, your allowance may be higher. Please contact us if you are not sure what your annual allowance is.

3. Gifting allowance

If your estate may be liable for Inheritance Tax, gifting money or other assets during your lifetime can reduce the bill, as well as allowing you to see the benefits gifts bring to loved ones. However, some assets are still considered part of your estate for Inheritance Tax purposes for up to seven years after they are gifted.

Making use of gifts that are immediately outside of your estate provides one solution. One of these is the annual gifting allowance, which means you can pass up to £3,000 on to a loved one tax-free. This is per individual, so as a couple you can gift £6,000 without worrying about Inheritance Tax each year.

4. Capital Gains Tax allowance

When you sell or dispose of certain assets, you may be liable for Capital Gains Tax (CGT) on the profit made. The current CGT allowance of £12,300 means that most people will not have to pay this tax. However, if you are likely to exceed the limit, spreading out the sale of assets across several tax years can make sense.

5. Dividend allowance

If you are invested in dividend-paying companies or funds, the dividend allowance can be a useful way to boost your income without increasing tax liability. For 2020/21, the dividend allowance is £2,000 and dividends within the allowance are tax free. If you are a company director, you can also pay yourself in dividends to make use of this allowance.

6. Marriage Allowance

Finally, if you are married or in a civil partnership, make use of the Marriage Allowance if one of you does not fully use their Personal Allowance or is a non-taxpayer due to other allowances such as the Personal Savings Allowance.

The Personal Allowance is the amount you can earn in total each tax year before paying Income Tax. Your total income may include your salary, pension benefits, investment returns and more. For the 2020/21 tax year, this is £12,500. If you or your partner do not exceed the Personal Allowance or are otherwise a non-payer, you can usually pass on 10% of your personal allowance to the other. This can mean reducing your tax bill by up to £250 as a couple.  In some cases, the allowance can be backdated over the previous four tax years if eligible.

Get in touch to discuss your allowances and financial plan

The above list is not exhaustive, other allowances may be valuable to you. If you would like to discuss your financial plan and the allowances, tax reliefs and incentives that could help you get the most out of your money, please get in touch.

While allowances are often discussed as the end of the tax year approaches, putting a medium-term plan in place that considers these can be beneficial. For instance, if you are investing through an ISA, spreading contributions across the 2021/22 tax year to fully use your allowance over 12 months can make sense. Likewise, spreading pension contributions across a year is preferable to a lump sum for many people. If you want to create a plan for 2021/2022, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations which are subject to change in the future.