Tax Year End – Use It or Lose It

Certain allowances are lost at the end of the tax year if they haven’t been used. Have you made the most of these opportunities? Use our handy checklist below to make sure you’ve used of all the allowances you don’t want to lose and minimised the amount of tax you’ll pay this financial year.

Tax-free income

Each of us has a personal allowance, which refers to how much money we can earn before starting to pay income tax on our earnings.

The personal allowance of tax-free income is £12,500 in the 2020/21 tax year. Pensioners drawing flexible income from personal pensions and company owners drawing dividends should ensure they maximise use of this allowance where appropriate. Remember, National Insurance may still apply for PAYE income other than from pensions.

The dividend allowance of £2,000 means dividends of up to this amount can be drawn in the 2020/21 tax year without any tax being paid. This is in addition to the personal allowance.

You can also reduce your total income for tax purposes by making gifts to charity or paying into a pension (see more about pensions below). This can be handy to get back your child benefit if you reduce income from above £50,000 to under it, or for higher earners who have lost some or all of their personal allowance by earning over £100,000.

ISAs

Each individual aged over 18 (or 16 for cash ISAs) can contribute £20,000 to an ISA in the 2020/21 tax year. Up to £4,000 of this can be put towards a lifetime ISA and will be topped up by 25% by the Government, assuming certain qualifying criteria are met and you are willing to accept some access restrictions.

Parents or guardians can also contribute up to £9,000 to a junior ISA on behalf of their children in the 2020/21 tax year.

Capital gains

Capital gains tax is a tax that’s applied to the amount of money you gain from selling something you own; like property, shares, business assets or personal possessions which are worth over £6,000.

Gains of up to £12,300 can be realised during the 2020/21 tax year without any tax being paid.

Inheritance tax

Inheritance tax applies to the property and possessions of a deceased person. The rate of inheritance tax is 40%, and it’s paid by the executor of the will on all assets over a certain threshold.

Each individual can make a capital gift up to £3,000 per tax year and the gift is immediately exempt from inheritance tax.

Pensions

Each individual can pay up to the lower of their earned income or £40,000 into a pension in the 2020/21 tax year and receive tax relief from the Government. If you don’t have any earnings, you can still make a gross contribution of up to £3,600 to your pension. Contributions of this amount can also be made for children or grandchildren.

For individuals with especially high earnings in the 2020/21 tax year, you can carry forward unused allowances of £40,000 from up to three previous tax years.

However, you can only get tax relief up to a maximum of the amount that you have earned in this tax year.

Need support with your financial planning?

Our expert financial planners can guide you through the process of managing your finances and navigating the tax year to make the most of your money. Book a free consultation to see how we can help you – call us on 01282 452255 or email hello@financialaffairs.co.uk

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