Making the most of your annual tax reliefs and exemptions can help you to make your money go further. So, it’s vital that you use these tax breaks before the current tax year ends on 5 April.
To help you, we’ve produced a useful tax year end guide which outlines how you can make the most of the available tax allowances before the end of the 2020/21 tax year.
Download the free guide now or read on for five valuable tax breaks you should use before 5 April 2021.
1. Your family’s Pension Annual Allowance
Pensions offer generous tax benefits and so maximising your contributions can really boost your wealth.
In the 2020/21 tax year your pension Annual Allowance is the lower of £40,000 or 100% of your annual earnings. This represents the maximum that you can pay into your pension each tax year while still benefiting from tax relief and includes pension contributions made by your employer or other third parties.
If you earn more than £240,000 you may be affected by the Tapered Annual Allowance which can reduce your overall Annual Allowance to just £4,000. Additionally, if you have flexibly accessed your pension, you may be subject to the Money Purchase Annual Allowance which also reduces the amount you can tax-efficiently save into a pension to £4,000 per tax year.
To maximise the tax benefits, don’t just use your own allowance but make use of your loved ones’ allowance too. Even individuals without an income, including children, can contribute £2,880 to a pension in the 2020/21 tax year and still benefit from tax relief.
Action: Maximise your family’s pension contributions before 5 April to get the most from the generous tax relief on offer.
2. Your annual Capital Gains Tax allowance
You pay Capital Gains Tax (CGT) when you sell certain assets and make a profit. This may include a second property, or shares that aren’t held in an ISA.
In the 2020/21 tax year, your CGT allowance of £12,300 means you can make profits up to this amount before tax is due. If you exceed this allowance, your rate of CGT will depend on your other taxable income:
- Standard CGT rate: 18% on residential property, 10% on other assets
- Higher CGT rate: 28% on residential property, 20% on other assets
Using the CGT allowance reduces the amount of tax due when you dispose of assets. So, as you can’t carry forward any unused allowance, you should make the most of it before 5 April.
Action: Consider selling assets or crystallising gains up to the £12,300 allowance limit.
3. Your ISA allowance
ISAs are a tax-efficient way to save or invest, as interest or returns are tax-free. In the 2020/21 tax year, you can place up to £20,000 into ISAs, choosing one account or spreading the allowance across several.
Cash ISAs operate in much the same way as a traditional savings account, but interest is paid tax-free. Stocks and Shares ISAs allow you to invest in the stock markets and other assets and returns are tax-free.
If you’re aged between 18 and 39 you can also allocate up to £4,000 of your annual ISA allowance to a Lifetime ISA (LISA). You will receive a 25% government bonus on contributions, although bear in mind you will be penalised if you make a withdrawal before you turn 60 for a purpose other than buying your first home.
Action: As you can’t carry forward any unused ISA allowance it’s important to maximise your ISA contributions each tax year.
4. Your Junior ISA allowance
As well as maximising your adult ISA contributions, it can pay to maximise Junior ISA (JISA) contributions for your child or grandchild.
The annual JISA allowance for 2020/21 is £9,000. The child can begin managing their ISA from 16, but they cannot withdraw money until they are 18.
Like their adult counterparts, interest and returns are tax-free.
Action: Maximise your contributions to a child or grandchild’s Junior ISA. If you don’t use the Junior ISA allowance before the end of the tax year, you will lose it.
5. Your Inheritance Tax gifting exemption
If you’re worried that your estate will be liable to Inheritance Tax (IHT), gifting to loved ones now can reduce the value of your estate and, therefore, the eventual bill.
There are several exemptions you can use which ensure gifts you make fall outside of your estate immediately. For example, your annual exemption means you can pass on up to £3,000 tax-free. The limit applies per individual, so couples can gift up to £6,000 between them.
The exemption can be carried forward for one year, so if you didn’t use the 2019/20 exemption you could gift £6,000 before 5 April 2021 (£12,000 for a couple).
Using this annual exemption allows you to pass on wealth to a loved one that is immediately considered outside of your estate for Inheritance Tax purposes.
Action: Make gifts of up to £3,000 before 5 April 2021.
Get in touch
Download our free tax year end guide to find out more about the allowances and exemptions you can use.
To find out more about how we can help you make the most of the tax breaks that are available, please get in touch. Email firstname.lastname@example.org or call us on 01189 876655.