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Personal tax planning in 2021/22

Chris Hadley, head of our Private Client team, looks at what’s changing for the new tax year

If there’s one thing to take away from Spring Budget 2021, it’s taking charge of your personal finances is going to be increasingly important over the next five years.

With the financial fallout from Covid-19 over the past year being the fiscal equivalent of fighting a war at more than £280 billion, we will be paying back that debt for many decades to come.

A new tax year is now upon us and it’s much the same as the previous 12 months from a personal tax planning perspective, while the threat of COVID-19 appears to be receding.

Here’s what you need to know from April 2021 and in some cases beyond.

The personal allowance will increase from £12,500 to £12,570 for 2021/22, a modest 0.5% rise in line with the Consumer Prices Index (CPI) rate of inflation for September 2020.

How much income tax you pay this year will depend on where in the UK you live, with different thresholds and rates applying to taxpayers in Scotland.

Income tax bands and rates – England, N. Ireland & Wales

Band 2021/22 Rate
Personal allowance Up to £12,570 0%
Basic-rate Over £12,570 to £50,270 20%
Higher-rate* Over £50,270 to £150,000 40%
Additional-rate* Above £150,000 45%

*The personal allowance is reduced by £1 for every £2 of income from £100,000 to £125,140.

The UK-wide personal allowance, along with all income tax thresholds in England, Northern Ireland and Wales, has been frozen by Chancellor Rishi Sunak until April 2026.

The income tax rates will also remain in place until the scheduled end of Parliament in 2024 in line with a Conservative manifesto pledge from 2019, which Sunak reiterated in last month’s Spring Budget.

Freezing these thresholds and tax rates amounts to a stealth tax grab, which will inevitably push many taxpayers into a higher tax bracket over the next five years, resulting in them paying considerably more income tax.

Income tax bands and rates – Scotland

Band 2021/22 Rate
Personal allowance Up to £12,570 0%
Starter-rate Over £12,570 to 14,667 19%
Basic-rate Over £14,667 to £25,296 20%
Intermediate-rate Over £25,296 to £43,662 21%
Higher-rate* Over £43,662 to £150,000 41%
Top-rate* Above £150,000 46%

*The personal allowance is reduced by £1 for every £2 of income from £100,000 to £125,140.

The dividends allowance remains at £2,000 for 2021/22, for the third year in a row.

Factoring in the slight increase to the personal allowance in 2021/22, the maximum tax-free income you can receive through dividends is £14,570.

Above that threshold dividends falling in the basic-rate band continue to pay tax at 7.5%, in the higher-rate band at 32.5% and dividends that fall within the additional-rate band will be taxed at 38.1%.

Capital Gains Tax
If you have any chargeable assets that you plan to sell and are worth more than you paid for them, your gain could be liable to Capital Gains Tax (CGT).
Assets that are sold in 2021/22 for gains in excess of £12,300 will be liable for CGT.

The rate of tax paid will depend on the type of asset sold and which marginal rate of income tax you pay. For residential property the rates are 18% for basic-rate taxpayers and 28% for higher-rate taxpayers. For other chargeable assets the rates are 10% for basic-rate taxpayers and 20% for higher-rate taxpayers.

That is unless the asset is held in trust, in which case the higher rates noted above always apply for gains in excess of £6,150.

The lifetime limit for gains falling within business asset disposal relief, which reduces the capital gains tax rate to a flat 10%, remains at £1m for 2021/22.

Pensions and savings

Lifetime allowance
Usually, the pensions lifetime allowance increases in line with that all-important CPI rate of inflation from the previous September. But for 2021/22 until April 2026, the lifetime allowance stays at £1,073,100.

This might not sound like a big deal for many people who may not ever get close to reaching this limit on the total amount of pension benefit that can be drawn from a pension pot, either as a lump sum or retirement income.

But potentially vast numbers of pension savers face being hit with a 55% tax charge if they withdraw anything above this limit as a lump sum over the next five years. If taken as income, a 25% tax charge awaits.

Those who have already started taking retirement income, and people who are in the final stages of their retirement savings strategy, need to be aware of this lifetime allowance and factor it into their planning.

The most you can save into your pension pot in 2021/22 – otherwise known as the annual pensions allowance – remains £40,000, although personal circumstances can mean the actual allowance is lower for a particular individual. You can contribute more by utlising any unused allowance from the previous three tax years.

ISAs remain tax-free up to an annual subscription value of £20,000, whether the income is from interest or investments.

Types of ISA include cash, stocks and shares, innovative finance ISAs, lifetime ISAs, and junior ISAs for under-18s.

You can opt to put all your savings in one type of ISA, or you could split them across several items.

Bear in mind, the lifetime ISA (£4,000) and junior ISA (£9,000), have maximum annual contribution limits and the help-to-buy ISA is closed to new applicants.

In the family

Inheritance tax
It’s very much business as usual with inheritance tax in 2021/22. Estates worth less than £325,000 will be tax-free, while the flat-rate of inheritance tax above this threshold remains at 40%.

The final increase to the residence nil-rate band took place in 2020/21, making it possible to protect a further £175,000 when passing on the family home to direct descendants, such as children or grandchildren.

Beyond 2020/21, future increases to the so-called family home allowance are due to be determined by the September CPI figure.

The inheritance tax thresholds, however, are to be maintained at their existing levels until April 2026.

The Treasury expects to net an extra £985m in inheritance tax receipts over the next five years as more estates become liable for the levy.

For married couples, providing the first person dies and leaves all of their assets to the spouse, it’s possible for the surviving spouse to double their nil-rate band to £650,000, rising to £1m when taking into account the residence nil-rate band.

Marriage allowance
If you earn less than your spouse or civil partner, you can continue to transfer £1,260 of your personal allowance to them in 2021/22 by using the marriage allowance.

The marriage allowance is only available if one spouse or civil partner earns less than the personal allowance, and the other is a basic-rate taxpayer.

If you have a personal tax query, call us on 01494 739500 and ask to speak to a specialist in our Private Client team.

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