Tax planning should enable you to arrange your affairs in ways that postpone or legally avoid taxes. No one likes to pay tax on their hard-earned money, so by employing effective tax planning strategies you could have more money to save and invest or more money to spend. Or both. Your choice.
It’s important to organise your financial and tax affairs to make the most of every tax-free allowance available to ensure you’re not paying more tax than you need to.
Keeping up with the latest changes to your tax and pension allowances can be difficult, so we’ve provided a summary to help you manage your tax affairs more effectively. The UK tax year starts on 6 April each year and ends on 5 April the following year.
The Income Tax personal allowance is £12,570. This is a slight increase from the previous year; in 2020/21 the personal allowance was £12,500.
The Income Tax personal allowance has been frozen until 2026, meaning that there will be no more increases until the tax year 2026/27.
The upper limit for the basic rate tax band in England, Wales and Northern Ireland is £50,270. Again, this is a slight increase, from £50,000 the previous year. The basic rate of Income Tax remains at 20%.
The higher rate tax band applies to income above the basic rate band but not over £150,000pa and the additional rate tax band applies to income over £150,000. Income above the basic rate tax band but below £150,000 is taxed at 40%, and income exceeding £150,000 is taxed at 45%.
In Scotland, the bands and tax rates applying to non-savings, non-dividend income (e.g. applying to earned and pension income) are slightly different. The personal allowance is the same, and income of between £12,571 and £14,667 is taxed at 19% (starter rate). Income between £14,668 and £25,296 is taxed at 20% (basic rate). Income between £25,297 and £43,662 is taxed at 21% (intermediate rate). Income between £43,663 and £150,000 is taxed at 41% (higher rate) and income over £150,000 is taxed at 46% (top rate).
The pension annual allowance is £40,000. This is the limit on how much you can contribute to your pension while claiming tax relief, providing those contributions are worth up to 100% of your annual earnings (£3,600 p.a. if more).
If you earn less than £40,000 a year, you are only entitled to claim tax relief on your pension contributions up to a maximum of 100% of your earnings (£3,600 if more). If your adjusted income is more than £240,000, you’ll likely be affected by the ‘tapered’ annual allowance, which reduces by £1 for every £2 you earn above this threshold. If you have accessed your pension, you may have triggered the Money Purchase Annual Allowance, which is £4,000.
You are also allowed to ‘carry forward’ unused pension allowance from up to three previous years (not if you are subject to the Money Purchase Annual Allowance). In the three most recent tax years, the total annual allowance was also £40,000.
The pension Lifetime Allowance (LTA) is £1,073,100. This is the limit on how much you can accrue within your pension savings in your lifetime before you incur an additional tax charge.
The pension LTA has been frozen until 2026, meaning that there will be no more increases until the 2026/27 tax year.
For those reaching state pension age after 5 April 2016, the State Pension is £179.60 a week. That’s an increase of £4.40 a week from 2020/21, or £228.80 more across the whole year.
For those with only a post 5 April 2016 National Insurance record, to claim the full State Pension, you must have 35 qualifying years on your National Insurance contributions record. If you have fewer than ten qualifying years, you won’t be entitled to any State Pension. Transitional rules apply to those who also have a pre 6 April 2016 National Insurance record.
You may be able to make voluntary National Insurance contributions to record more qualifying years of National Insurance contributions.
The personal Individual Savings Account (ISA) allowance is £20,000, which is the same as the previous tax year.
This means that you can save or invest up to £20,000 in one ISA, or two or more ISAs of different types, and any growth on your savings or investments is free from Income Tax and Capital Gains Tax and any withdrawals are free from tax.
The Capital Gains Tax allowance is £12,300. This is the same as the previous year. It has been frozen until at least 2026.
The Inheritance Tax nil-rate band is £325,000. This is the same as the previous year.
When leaving a property to a direct descendant on your death, there is an additional allowance called the ‘residence nil-rate band', which is currently £175,000.
The residence nil-rate band was due to rise with inflation in April 2021, but both thresholds have been frozen until 2026. It still means, however, that married couples and registered civil partners can leave up to £1m on their deaths free of Inheritance Tax.
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The UK taxation system can be daunting and complex, so it’s important to understand your individual situation and analyse whether you are taking advantage of the tax planning solutions available to you in order to plan effectively. To discuss how we could help you, please contact us for further information.