With just over a month gone of the current tax year, if you haven’t done so already then now is a good time to review your and your family’s personal finances and tax positions for the current tax year, perhaps before your thoughts turn to your much anticipated summer holiday! writes Pearson May partner Jacqui Bowden.
The 2021/22 tax year is much the same as the 2020/21 tax year from a personal tax planning perspective. But it is still important to have a good understanding of the tax rates and thresholds for the current year, so that you can plan your finances and review your tax affairs accordingly. I set out below a few of the main points worth considering.
Income Tax
The personal allowance has increased 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 and the rest of the UK. Below are the Income Tax bands and rates applicable to England, Wales and Northern Ireland:
|
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 of £12,570, along with all Income Tax thresholds in England, Wales and Northern Ireland, have been frozen until April 2026. The above Income Tax rates are due to remain in place until the scheduled end of Parliament in 2024, in line with a Conservative manifesto pledge from 2019, which the Chancellor reiterated in March’s Spring Budget. The freezing of these thresholds and tax rates will inevitably push many taxpayers into a higher tax bracket over the next five years.
Don’t forget that you can transfer 10% of your personal allowance (£1,260 in 2021/22) to your spouse or civil partner, as long as you earn less than the personal allowance and your spouse/civil partner is a basic-rate taxpayer. This can reduce your tax by up to £252 in the tax year.
The dividend nil rate band remains at £2,000 for 2021/22, for the fourth year in a row. This means the first £2,000 of any dividends received in a tax year are taxed at 0%. Dividends received over and above this allowance (and above the personal allowance) are taxed at 7.5% within the basic-rate band and 32.5% in the higher-rate band, with dividends that fall within the additional-rate band being 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). Any such chargeable assets that are sold in 2021/22 and give rise to a gain of more than £12,300 will be liable to CGT. The rate of CGT payable will depend on the type of asset sold and which marginal rate of Income Tax you pay, with different rates applying to basic-rate taxpayers and those in the higher or additional-rate bands. Broadly, the CGT rates for most assets other than residential property are 10% to the extent that the gain is within your basic-rate band and 20% thereafter. Higher rates of 18% and 28% respectively apply to gains on residential property. Don’t forget that, for disposals of residential property that result in a gain, the gain must be reported to HM Revenue & Customs (HMRC) within 30 days following the date of completion, and the tax must be paid over to HMRC by the same date.
The lifetime limit for gains qualifying for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief), which reduces the CGT rate to a flat 10%, remains at £1m for 2021/22.
Pension Allowances and ISAs
Usually, the pensions Lifetime Allowance increases in line with the CPI rate of inflation from the previous September. However, for 2021/22 until April 2026, this link has been removed and the Lifetime Allowance is frozen at £1,073,100. The standard maximum amount that you can save into your pension pot in 2021/22 – otherwise known as the Annual Allowance – remains at £40,000, although personal circumstances can mean the actual allowance is lower for a particular individual. You may be able to contribute more by utilising any unused Annual Allowance from the previous three tax years.
Income and gains on investments held within ISAs remain tax free up to an annual subscription value of £20,000.
Inheritance Tax
It’s very much business as usual with Inheritance Tax in 2021/22. Estates worth less than £325,000 are usually tax-free, while the flat-rate of Inheritance Tax above this threshold remains at 40%. The final increase to the Residence Nil-Rate Band (RNRB) 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. The RNRB is progressively withdrawn for individual estates valued at more than £2m.
For married couples or civil partners, where the first spouse/civil partner dies and leaves all their assets to the survivor, it is possible for the surviving spouse to double their nil-rate band to £650,000, rising to £1m when taking into account the RNRB.
Gifts made during your lifetime can impact on the tax payable upon death, so please be sure to keep a careful note of these. Your executors will be eternally grateful!
The above is for general guidance only and no action should be taken without obtaining specific advice.
