Tax and Allowances 2020/21
As the new tax year starts, in the midst of the Covid-19 crisis, we thought it was important to ensure the new tax and allowance information (from a financial planning perspective) is available in a concise format.
So here goes……………………………..
Income
Personal Allowance - £12,500
The personal allowance is the amount you can earn before you start to pay income tax. Your personal allowance is reduced by £1 for every £2 your adjusted net income is above £100,000 (meaning it is completely lost when your adjusted net income is £125,000 or above).
Any income above £12,500 is taxed at the rate it falls into:
Tax Band
Taxable Income
Tax Rate
Personal Allowance
Up to £12,500
0%
Basic Rate
£12,501 - £50,000
20%
Higher Rate
£50,001 - £150,000
40%
Additional Rate
Over £150,000
45%
Dividend Allowance - £2,000
The dividend allowance is the amount of dividend income you can receive without attracting tax. Any dividend income received above the allowance is taxed, the level of tax depends on your highest income tax rate.
Any dividend income above £2,000 is taxed depending on your highest income tax rate:
Tax Band
Tax rate on dividends over the allowance
Basic Rate
7.5%
Higher Rate
32.5%
Additional Rate
38.1%
Investments
Capital Gains Tax Allowance - £12,300
Capital Gains Tax is the tax levied on the profit when you sell an asset that has increased in value. As with the personal allowance, you only have to pay tax on any gain above the allowance.
Any gain above £12,300 is taxed depending on your highest income tax rate:
Tax Band
Tax rate on gains over the allowance
Basic Rate
10%
Higher/Additional Rate
20%
Residential Property Rate Increase
8%
Individual Savings Account (ISAs)
An ISA is a savings or investment account which benefits from the following tax exemptions:
· No capital gains tax
· No tax on interest
· No tax on dividend income
The total annual ISA contribution allowance is £20,000. There are different types of ISA with their own allowances:
· Cash ISA/Stock & Shares ISA - £20,000
· Junior ISA - £9,000
· Lifetime ISA - £4,000
Pensions
The pension allowance remains unchanged at the lower of £40,000 (£32,000 net) or the level of earned income. For those with no earned income (including children) the allowance is £3,600 (£2,880 net).
In the last tax year, the annual pension allowance was tapered for those earning more than £110,000 down to £10,000. The annual allowance taper, introduced in 2016, provides that the pensions annual allowance, is reduced by £1 for every £2 that an individual's adjusted income exceeds the threshold.
This tax year (2020/21) the threshold earning to trigger tapering has increased to £200,000. At the same time, the reduction for higher earners has increased. This means that those earning above £300,000 will see their annual allowance reduce from £10,000 to £4,000.
Summary
Well, thats a wrap.
If you have any queries or need any support, or advice, please don’t hesitate to contact us.