Personal Tax, thresholds and allowances
The Personal Allowance – the amount you can earn before paying Income Tax – increases on 6 April 2021 to £12,570 from £12,500. This will lead to a small reduction in the amount of tax paid each year for most people.
In England, Northern Ireland and Wales, the threshold for paying the Higher Rate of income tax (which is 40%) increases to £50,270 from £50,000. This amount includes the increased Personal Allowance.
For residents in Scotland, the threshold for paying the Higher Rate of Income Tax increases slightly from £43,430 to £43,663. These bands and rates of income tax only apply to non-savings income such as your earnings, pension income or rental income.
Full breakdown of the new Income Tax bands:
| Rate | Scotland | Rest of the UK |
|---|---|---|
| Personal allowance | £12,570 | £12,570 |
| 19% (starter rate) | £12,571 - £14,667 |
n/a |
| 20% (basic rate) | £14,668 - £25,296 | £12,571 - £50,270 |
| 21% (intermediate rate) | £25,297 - £43,662 |
n/a |
| 40% (higher rate UK) |
n/a |
£50,271 - £150,000 |
| 41% (higher rate Scotland) | £43,663 - £150,000 |
n/a |
| 45% (additional rate UK) |
n/a |
Over £150,000 |
| 46% (top rate Scotland) | Over £150,000 |
n/a |
Personal pensions
The maximum amount that you can pay into a personal pension before potentially incurring a tax charge remains capped at the lower of your earnings and £40,000 per tax year. You may be able to put more into your pension if you’ve not used all of your allowances in the last 3 years (this is called ‘carry forward’). Or it might be much less if you earn over £240,000 a year or have started to take your pension in a flexible manner. This can get complicated and we’d recommend speaking to a Financial Planner if you think you are affected.
The lifetime allowance for pension savings stays at £1,073,100 and is frozen at this level until at least 2026. If you could go above this threshold it might be worth speaking to a Financial Planner.
Capital Gains Tax (CGT)
Another tax allowance which remains unchanged from the 2020/21 tax year, which is also frozen until 2026, is capital gains tax which is set at £12,300.
There are two different rates of CGT; one for property and one for other assets. The amount that you pay will depend on the tax band you fall into and the asset you've made a profit on, as the below table shows:
Tax band CGT rate on assets CGT rate on property
Basic-rate payer 10% 18%
Higher or additional-rate payer 20% 28%
Use of the capital gains tax allowance is an important aspect of tax efficient planning so it’s worth seeking advice from a Financial Planner if you think this could affect you.
Business Asset Disposal Relief
Closely aligned to CGT is Business Asset Disposal Relief (until April 2020 this was known as Entrepreneurs’ Relief) which can reduce the rate of CGT on disposals of certain business assets from 20% to 10%.
The minimum period which the qualifying conditions for Business Asset Disposal Relief applies is 2 years. This is another rather complex area which you could benefit from seeking financial advice.
Individual Savings Account (ISA) allowance
The ISA allowance remains unchanged at £20,000 for the new tax year.
An ISA can play an important role in savings and planning your finances and, if you’re nearing the £20,000 limit, it’s really important you give consideration to whether or not you’re using the right savings and investments vehicles for the excess. As with all investments, their value can go down as well as up, and could be worth less than what was paid in. If you’re unsure, this is something your Financial Planner can help with.
Take advantage of your new reliefs and allowances
Much like the resolutions we make on 1 January, the new tax year provides a good opportunity for a “fresh start” when it comes to your financial situation. Speak to your Financial Planner to take advantage of the opportunities that are now open to you in the new tax year. Making a payment into a pension or ISA earlier in the tax year can give your investments more opportunity to grow as they are invested for longer period in a tax-advantaged investment.
If you don’t currently have a Financial Planner, we’d be delighted to help you look after your finances. Get in touch for a no-obligation consultation with one of our Financial Planners to see what we can do for you.
Laws and tax rules may change in the future and the information here is based on our understanding in April 2021. Personal circumstances also have an impact on tax treatment. Investments can go down as well as up meaning you may get back less than you put in. The information in this blog should not be regarded as financial advice.