Annual Allowances – Use them or lose them!

Annual Allowances

Use it or lose it! It’s almost time for the new tax year to start. Don’t forget to use up your annual allowances, because you’ll lose them if they don’t get used.

Pensions

Private pension contributions are tax free up to a certain amount. This applies to most private pension schemes for example:

• Workplace pension
• Personal and stakeholder pensions

You can get tax relief on your pension contributions worth up to 100% of your annual earnings. This is applied automatically if:

• Your employer takes workplace pension contributions out of your pay before it deducts your income tax
• Rate of income tax is 20% – your pension provider will claim it as tax relief and add it to your pension pot

Annual allowance is the most you can save in your pension pot, per tax year (April 6^th – April 5^th), before you have to pay tax.

This year’s annual allowance is £40,000. As the new tax year starts on April 6^th, you’ve got a small amount of time left to use up your allowance for this tax year. So, if you have more money to put into your pension pot, do it before the new tax year and make the most of your yearly allowance.

ISAs

The annual ISA allowance for tax year April 2021 to April 2022 is £20,000.

You can save up to £20,000 into one ISA account or spread it over the four different types (cash ISA, lifetime ISA, stocks and shares ISA, innovative finance ISA).

You can only pay up to £4,000 into a lifetime ISA per year.

So, if you have funds to put into your ISA accounts, take advantage of the allowance before the start of the new tax year this April.

Capital Gains Tax

You only have to pay capital gains tax on your overall gains above your tax-free allowance.

The capital gains tax free allowance is £12,300.

You pay capital gains tax on the gain when you dispose of (sell):

• Most personal items worth £6000 or more (not your car).
• Your property that’s not your main home
• Your property that you’ve let out, used it for business or it’s very large
• Business assets
• Shares that aren’t in an ISA or PEP

These are known as chargeable assets.

Personal Allowance

The personal tax allowance for 2021/2022 is £12,570. This is the amount of income that you do not have to pay tax on.

Marriage Allowance

The marriage allowance lets you transfer £1,260 of your personal allowance to your husband, wife, or civil partner. This reduces their tax by up to £252 in the tax year.

However, to benefit as a couple, you (the lower earner) must normally have an income below the personal allowance (lower than £12,570).

Inheritance Tax and Gifts

Inheritance Tax

This is tax on the estate (property, money, and possessions) of someone who’s died. There’s usually no inheritance tax to pay if:

• the value of your estate is below the £325,000 threshold
• you leave everything above the £325,000 threshold to your spouse, civil partner, a charity, or a community amateur sports club

The standard Inheritance Tax rate is at 40%. It’s only charged on the part of your estate which is above the threshold (£325,000).

Gifts

You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your Annual Exemption.

This £3,000 of gifts or money can be given to one person or split between several people.

You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.

Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.

You can carry any unused annual exemption forward to the next tax year – but only for one tax year.

National Insurance and Health and Social Care levy

As of April 2023, the Health and social care levy will be introduced. Meaning you pay 1.25% as an extra tax to go towards funding the NHS and social care. This 1.25% will be a separate levy that people will have to pay, as well as NIC.

Why will this affect me in the upcoming tax year? We hear you ask.

Well, the UK Government have decided to temporarily increase National Insurance rates by 1.25% as of the 6^th of April 2022 to prepare people for the 2023 H&S care levy. The 1.25% increase in National insurance will affect Employer class 1, employee Class 1, Class 1A, Class 1B and Class 4 for one year.

From the 6^th of April 2023, the NIC rates will reduce back down by 1.25%, to the 2021/22 levels. Then the Health and Social Care levy will become a separate new tax of 1.25%.

Conclusion

Don’t forget to use your annual allowances before the current tax year ends on the 5^th of April 2022. Because if you don’t use it, you’ll lose it.

Also, make sure to spend some time tax planning, especially as the new Health and Social care levy will be increasing National Insurance rates.

Contact Spectrum today on 01179 902218 if you have any questions regarding any of the content we covered in this blog – we’re always happy to help.

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Categorised in: Accountancy Services, Business, Small Business

This post was written by Daisy Vowles