The allowances play an important role in financial planning as we become eager to utilise all available as we draw closer to tax year end. The amount of tax reliefs and allowances can become confusing; therefore the guide below shows a brief summary of each allowance.
The personal allowance is the amount of income each year, an individual can receive free of tax. The current amount for this tax year is £12,500 and this can be subject to change each tax year. Any personal allowance changes are revealed at each budget. The next one is March and should give us insight into what the personal allowance will be in tax year 2020/21.
Everyone has a personal allowance, even children, and this is applied every year. You cannot carry forward any unused allowance and any earned income/ pension income is tested against this allowance. Once completely used, income is taxed at basic, higher and additional rates of tax.
This allowance applies to married couples/ civil partnerships only. If one spouse receives income below the personal allowance, 10% of the full allowance can be transferred to the other spouse, if they are a basic rate taxpayer. The receiving spouse must be earning more than the personal allowance and cannot be a higher or additional rate taxpayer.
10% of the current personal allowance is £1,250 and this can be transferred saving £250 of tax in this tax year. Claims for the marriage allowance can be backdated to include any tax year since 5th April 2015, as long as the couple is eligible.
If you think you may be eligible you can apply online through the Gov.uk website and if successful, changes to your Personal allowances will be backdated to the start of the tax year (6th April).
If an individual owns shares of a company, or is a director of a company, they may be able to receive income in the form of dividends. Dividends are different from earned salary therefore the personal allowance does not apply. The first £2,000 of any dividend income received is tax free. This has not changed for the last couple of tax years.
Capital Gains Tax Allowance
This is the amount of profit an individual can make from an asset, this tax year, before any tax is payable. The current annual exempt amount is £12,000 meaning any capital gain falling below this figure is tax free.
Personal Savings Allowance
This allowance allows you to earn interest to a certain level tax free. Applies to interest earned from non-ISA savings accounts and current accounts. Any interest or income earned from Premium bonds is not covered by this allowance. For basic rate tax payers, the first £1,000 of interest is tax free, for higher rate tax payers, the first £500 is tax free. Those who are additional rate tax payers do not have an allowance.
Starting Rate for Savers
Interest from banks is taxable. Everyone is entitled to the PSA however some may be entitled to a Starting rate for savers. Up to £5,000 of savings income can be taxed at 0% but this is dependant on how much you earn.
The £5,000 is available to anyone earning up to the personal allowance- £12,500. Once you earn more than this, the amount of starting rate is reduced £1 for every £1 over the personal allowance you earn. This means that, if you earn over £17,500, you will no longer be entitled to the starting rate and all interest will be taxable (after taking into account the PSA).
The ISA allowance for this tax year is £20,000 meaning that you can invest up to this figure tax free each tax year. Each individual is entitled to £20,000 a year, which can split over a number of ISAs- cash, Stocks and Shares, Help to buy, Lifetime. Care must be exercised when investing in the latter two products as these have their own, smaller limits, which may result in penalties if breached. The table below details the different ISA’s available.
|Stocks and Shares ISA||£20,000|
|Help to Buy ISA||£2,500|
This is the amount of money you can contribute to your pension each tax year and receive tax relief on. For the last few tax years, £40,000 has been the limit. Everyone is entitled to £40,000 a year and if the whole amount is not used in one tax year, this can be carried forward to the following year if required. Individuals can carry forward up to 3 previous tax years of unused annual allowance.
However, please note that pension contributions are also tested against ‘relevant earnings’ meaning that, in order to receive the tax relief, you must take into account the annual allowance and the amount you earn each year.
Please be aware that if an individual earns over £110,000 theirs may be reduced or ‘tapered’ to a minimum of £10,000.
Money Purchase Annual Allowance (MPAA)
If an individual takes any income from their pension plan and the income is taxable (does not include tax free cash only withdrawals) they will trigger the MPAA. This reduces the annual allowance down for that individual to £4,000 each tax year. The MPAA cannot be carried forward from previous tax years.
Lifetime Allowance (LTA)
This is a limit to the amount that can be accrued in pension schemes. The current lifetime allowance is £1,055,000 and has slowly creeped back up from a significant drop to £1 million in tax year 2016/17. The LTA currently increases with the Consumer Price Index (CPI). Any pension benefits taken above this amount will suffer a tax charge, dependent on how the benefits are taken. Each individual has an LTA and this is based on all pension benefits, meaning those with a number of pensions that have higher fund values may have an issue.
The highest figure the lifetime allowance reached was £1.8 million and this figure slowly dropped over a number of tax years, to £1 million. A number of lifetime allowance protections were created over the tax years it slowly reduced and this protection made sure that those who applied, and had pension benefits valued over the Lifetime allowance at the time, could continue to have those benefits without incurring a tax charge. Please note that there are a number of criteria the benefits have to adhere to, to keep the protection.
Annual Gift Exemption IHT
The annual exemption is the amount that can be gifted each year from each individual without creating a PET (potentially exempt transfer) for Inheritance tax purposes. The amount is currently £3,000 a year and this can be gifted without having to wait the normal 7 year time period for a monetary gift to fall outside an individual’s estate. This amount can be carried back a tax year meaning that, if someone has not made a gift in the previous tax year, they can make a gift of £6,000.
5% Deferred Allowance
As an investor, you are able to withdraw 5% of the initial lump sum that was paid into investment bonds, tax deferred, for 20 years. If the full amount is not withdrawn each policy year, this will be carried forward into the next policy years indefinitely, until this is all used up. These tax deferred allowances are effectively a return of capital and will not be taxed.
If you are looking to make the most of your allowances, it is always wise to seek financial advice. Call us on 01482 219 325 or email [email protected] for a free, no obligation initial meeting and we can discuss your situation.