While the news in recent weeks has been dominated by the coronavirus pandemic, it’s been easy to forget that we slipped into a brand-new tax year on 6 April.

While clients may be preoccupied with ensuring their business survives the nationwide lockdown (our guide to the support available is here) the new tax year offers plenty of opportunities for clients to use their new allowances and exemptions.

Time for clients to use their new ISA allowance

During this year’s Budget, the Chancellor made no changes to the ISA, meaning that individuals can contribute up to £20,000 to their ISA in the 2020/21 tax year. Returns on a Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax while interest received on a Cash ISA is paid tax-free.

The start of the new tax year is a great opportunity for clients to use their allowance, as investing in April offers more potential for tax-efficient growth than waiting until the deadline for contributions in March or April 2021.

Research from HL has compared the returns of two ISA investors using their allowance at different points in the tax year. In the hypothetical scenario, both investors contributed the maximum possible to their ISA each tax year since 1999 (a total of £186,560) and invested in the FTSE All-Share index (with dividend reinvested).

• Investor A invested their allowance on the first day of each tax year
• Investor B waited until the last day of the tax year to invest their allowance

The strategy of investing on the first day of each tax year yielded the best results, with the ISA worth £342,445 at the end of the period, more than £14,500 more than the investor who waited until the end of the tax year.

Note that the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Junior ISA allowance more than doubles in 2020/21

While the adult ISA allowance remains the same in the 2020/21 tax year, the annual subscription limit for the Junior ISA has more than doubled, from £4,368 to £9,000.

In this year’s Budget statement, the government said: “By saving towards their future, families can give children a significant financial asset when they reach adulthood – helping them into further education, training, or work.”

In the 2020/21 tax year, clients can therefore contribute up to £9,000 into a tax-efficient savings vehicle for their child or grandchild.

Use your new pension allowances

There has been no change to the pensions Annual Allowance which remains at £40,000 in the 2020/21 tax year. This means clients can pay up to £40,000 (or 100% of their earnings) into their pension in the 2020/21 tax year and retain tax relief.

In the Budget, the Chancellor did change the rules regarding the Tapered Annual Allowance by raising both the ‘threshold’ and ‘adjusted’ income levels at which the taper applies by £90,000.

Now, if clients earn an ‘adjusted income’ above £240,000 (up from £150,000 in the 2019/20 tax year) they will lose £1 of their Annual Allowance for every £2 of income above this threshold, to a minimum of £4,000 per year. Consequently, some high earners will find they can contribute a lower amount to their pension and retain tax relief.

The Lifetime Allowance has been increased in line with inflation and now stands at £1,073,100.

Now we’re in a new tax year, clients can begin to utilise their 2020/21 pension allowances. If any clients need advice concerning the various pension allowances and any that may apply to them, we can help. Please get in touch for a chat.

Tax and National Insurance allowances in 2020/21

There have been relatively few changes to tax or National Insurance allowances in the 2020/21 tax year.

The Personal Allowance and Income Tax bands remain unchanged, although the threshold for paying employee Class 1 National Insurance Contributions has risen to £9,500.

The tax-free dividend allowance remains at £2,000 for the 2020/21 tax year, with dividends above the £2,000 threshold taxed at 7.5%, 32.5% or 38.1% depending on a client’s tax bracket.

Clients can also now use their annual Inheritance Tax gift exemption which remains at £3,000.

The Capital Gains Tax (CGT) exemption has risen slightly in the 2020/21 tax year, to £12,300. As we are in a new tax year, clients can use their new Capital Gains Tax exemption.

Note that there was an important change to Entrepreneurs’ Relief in the Budget. Previously, clients would have been charged Capital Gains Tax at a rate of 10% on the first £10 million of gains, with gains above this limit being taxed at the usual 20%.

However, in 2020/21, the lifetime gains limit for Entrepreneurs’ Relief has been cut to a far less generous £1 million. As a result, some business owners planning to sell will now face far higher CGT.

And, as Entrepreneurs’ Relief applies to an individual, the £1 million allowance is the maximum an individual can claim, rather than for each business they sell.

Get in touch

Now we are in a new tax year, clients can begin to use their 2020/21 allowances and exemptions. If you have any clients that would benefit from advice in this regard, please get in touch with us. Email enquiries@boolers.co.uk or call 0116 2407070.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.