Know your 2020-21 tax allowances

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As 2020 progresses it’s worthwhile knowing exactly what tax allowances and exemptions are available to you. This helps you manage and plan investments.

There are so many tax and accounting allowances that are missed by people each year. They are legitimate ways to help savers and investors maximise savings and investments.

Only halfway through the financial year, the coronavirus pandemic has thrown many people off track. In many cases, earnings, budgets, spending and savings have been put on hold.

Don’t worry. There is still time to make the most of this year’s allowances.

UK tax basics

The obvious thresholds to be aware of are the basics associated with earnings.

Understanding what level of income triggers tax payments means that you can plan how to make the best of your money.  

The National Insurance (NI) threshold is now £9,500. Most of us pay NI, and it establishes your entitlement to certain state benefits if ever you need support and financial help from the government.

For UK earnings, the Personal Allowance is £12,500. Put simply, you can earn up to this amount before you pay the standard rate of tax. You will pay tax on every pound you earn over this amount – unless there is a tax allowance that enables you to use your money in a more efficient way.  

When you reach certain thresholds, you pay more tax. The £50,000 higher-rate threshold is in place across parts of the UK where Income Tax is not devolved. For Wales, Scotland and Northern Ireland you can always check for existing and planned changes on the GOV.uk site.

Once you know your personal allowance, anything extra earned above that will be subject to income tax.

Use your pension for tax relief

Pensions enable us to live a comfortable life during retirement. The more you pay in, the better chance you have of achieving an income in retirement that enables you to do the things you want to do.

Using tax relief can significantly boost pension savings and performance. Better still, it means your money is working for you.

For basic rate taxpayers, 20% tax relief is available. This rises to 40% for higher rate taxpayers.

As an example, if you earn £60,000 in a year you will pay 20% tax on the bulk of your earnings and the higher rate tax on remaining £10,000 of your earned income.

If you save £15,000 into a private pension you will automatically get tax relief (20%) at source on the full £15,000. However, you can claim an extra 20% tax relief on the £10,000 that you have paid a higher rate of tax on.

You do not, however, get tax relief on the additional £5,000 you put in your pension. Still, claiming back the tax on the £10,000 is worth it for long-term pension growth. 

The maximum you can pay into your pension in any one tax year is £40,000. The Lifetime Allowance – the maximum amount you can have in a pension over a lifetime – has increased to £1,073,100.

Make the most of ISAs

Who doesn’t want to help their children? As well as boosting the income they have in the future, saving into ISAs for your children can help you make the best use of available tax allowances.  

This year, the amount you can save into a JISA (Junior Individual Savings Account) or a Child Trust Fund has risen substantially – from £4,368 to £9,000.

The ISA (Individual Savings Account) allowance, including the Lifetime ISA allowance if used, remains unchanged at £20,000. This means that you can save this amount without paying tax on that part of your earnings.

It is an incentive to save.

Other important allowances include Inheritance Tax (IHT). Making the most of such taxes will often depend on whether the applicant is an individual, a married couple or acting as civil partners.

Getting a full understanding and making the most appropriate use of tax allowances can be very time consuming. Using an independent financial adviser will ensure that you don’t miss out.

How to contact an independent adviser

Knowing that you can trust a financial adviser is the first important step. We are independent, authorised and regulated by the Financial Conduct Authority.

We take time to understand exactly what clients need. We take things at a pace our clients are comfortable with.

Please call us on 0808 1234 321 or email info@logic-wp.com to start the discussion about how best to make use of your tax allowances.

Please be aware the value of investments or income from them can fall as well as rise. We are here to help you make informed decisions as you put important things in place for you and your family.

* Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire, and the surrounding area, but not limited to the region.