Are you making the most of your 2020/21 tax allowances?

Pension allowances

Each year you can pay as much as you earn, usually up to £40,000 (although this tapers down to £4,000 for higher earners) into a pension and benefit from pension tax relief. This is known as your annual allowance. There is also a lifetime allowance, which is the amount you can hold in pensions over your lifetime.

Pension tax relief

The Government automatically tops up pension payments by 20% and those paying higher or additional rates of tax can claim back another 20% and 25% respectively through Self-Assessment tax returns.

Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.

Pension carry forward

You may be able to take advantage of pension carry forward to make extra pension contributions by carrying forward unused pension allowances from the previous three years.

ISA allowances 

The ISA allowance for 2020/21 is £20,000 for adults and £9,000 for children. You can’t carry over an ISA allowance from one tax year to the next. ISAs are also free from Income Tax and Capital Gains Tax.

The Personal Savings Allowance

The Personal Savings Allowance is a tax-free allowance for interest payments. It is £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers don’t benefit from this.

Dividend income tax-free allowance

All taxpayers receive a £2,000 tax-free allowance for dividend income.

Capital Gains Tax annual allowance

Capital Gains Tax is a tax on the profits you make when you sell (or ‘dispose of’) something (an ‘asset’) that has increased in value. It is the gain you make that is taxed, not the amount of money you receive from the sale or disposal.

The Capital Gains Tax annual allowance is how much of a gain you can make in a tax year without paying any tax. It is sometimes referred to as the ‘forgotten allowance’ because it is less well known and understood than many other tax allowances. Using the Capital Gains annual allowance can be a way to create tax-free returns. The allowance is currently £12,300 but with the Chancellor asking the Office of Tax Simplification to review it, there is a lot of speculation that this could change.

Financial gifts tax allowances

There are a number of tax-free financial gifts that you can make each year. These financial gifts leave your estate immediately so there won’t be any Inheritance Tax to pay. These include:

• Gifts to a civil partner, husband or wife (if their permanent home is in the UK)
• Up to £3,000 in gifts each tax year. This can be carried over for one year giving a total of £6,000
• An unlimited number of gifts up to £250 per person
• Wedding gifts to a child of up to £5,000, to a grandchild or great-grandchild of up to £2,500  or to anybody else of up to £1,000
• Unlimited payments towards the living costs of a child, elderly dependant or ex-spouse
• Regular gifts from surplus income that don’t have an impact on your standard of living

Structuring finances as a couple

It is often possible for those who are married or in a civil partnership to save money by structuring finances as a couple so both people’s tax allowances are used effectively. This could be an especially good idea if one of you pays tax at a lower rate than the other.

VCTs and complex tax-efficient investments

More complex and higher-risk tax-efficient investments such as Venture Capital Trusts (VCTs) offer generous tax breaks to encourage investment into smaller, younger companies. Because of the risks involved, these are not suitable for everyone but if you are a higher-rate or additional-rate taxpayer who can tolerate a high level of investment risk, you could also consider them. Please see * below for further information.

Find out more about VCTs here. 

How we can help

Bestinvest offers ISAs and SIPPs to help you invest in the most tax-efficient way. We also offer VCTs for more experienced investors.
Through our sister company Tilney, we also have a nationwide team of financial planners who can help you with your tax planning: have a look at our latest Tilney Event On Demand about tax allowances. You can also book a free initial consultation to find out more.

Book now

The value of an investment may go down as well as up, and you may get back less than you originally invested. Please note we do not provide tax advice.