How to make the most of your tax allowances for 2021/22: A handy checklist for savers, investors and couples

As the tax year hurtles to a close, many taxpayers’ thoughts will turn towards whether they are using their tax allowances to the maximum benefit.

In some areas - ISAs and pensions for instance - it is possible still to take action to use up allowances for the 2021/22 tax year. In others it will be more difficult, but there’s no better time than now to start planning for the next tax year.

Adrian Lowery, personal finance expert at investing platform Bestinvest, says: ‘There are some changes – or in the case of many tax allowances, no changes - coming in on 5 April that we know about. But there is also a Budget expected in late March, when the Chancellor will have more to say on allowances and reliefs.’

Pensions

Annual allowance

Each year you can pay a total amount equal to your salary but up to a maximum of £40,000 (although this can taper down to £4,000 for higher earners) into a pension and benefit from pension tax relief. This is known as your annual allowance.

‘Those who have spare money to put away towards the end of the tax year and who have not used this allowance can still take advantage of pensions tax relief,’ says Lowery. ‘The taxman automatically tops up pension payments by the basic rate of 20% and those paying higher or additional rates of tax can claim back another 20% and 25% respectively.’

There is also a lifetime allowance, which is the amount you can hold in pensions over your lifetime without incurring tax penalties when you take pension benefits.

Pension carry forward

Once you have used up your current year allowance, you may also be able to make extra pension contributions by carrying forward unused pension allowances from the previous three years.

‘This can be of particular interest to workers, like the self-employed or small business owners, who have inconsistent earnings and enjoy much higher income in some years than others,’ says Lowery.

Savings and investments

The ISA allowance is still £20,000 for 2021/22, which means any sums up to that amount held in the wrapper are exempt from income tax on cash interest payments. Both income and capital gains from shares and bonds are tax-free within ISAs too.

‘While cash ISAs have historically been popular with savers, the wind has been taken out of their sails somewhat by the personal savings allowance, which means that interest payments of up to £1,000 on any savings account for basic rate taxpayers are tax exempt. That falls to £500 for higher-rate taxpayers, and zero for additional rate,’ says Lowery.

‘With today’s low interest rates, you’d need substantial cash sums to worry about paying tax on interest payments – though rates are starting to rise. So only those who have amassed substantial cash savings and the highest earners need to consider utilising their ISA allowances if they are not using them for investments.’

Profits and dividends

Dividend income

All dividends earned within an ISA are tax free, as is income from bonds. But taxpayers also receive a £2,000 allowance for dividend income on top of the personal income tax allowance of £12,570. This means that if your only income is from dividends – for instance, from a share in a private company - you could earn £14,570 before paying tax.

‘This is particularly important for company owners who pay themselves in dividends to take advantage of the lower rates compared to income tax – not least because dividend tax is set to rise,’ says Lowery.

The basic rate this tax year is 7.5% but that is increasing to 8.75% in 2022/23. The higher rate of dividend tax is 32.5% this year, going up to 33.75%.

Capital gains tax

This can be charged on the profits you make when you sell – or dispose of - certain assets, such as a second property or buy-to-let, shares and funds (unless they're held in an ISA or pension), cryptocurrency holdings, a business or certain valuable possessions (if they're sold for more than £6,000).

The tax is only charged on the increase in the value of the asset and the personal allowance is currently £12,300.

Louise Higham, chartered financial planner at Tilney Smith & Williamson (owner of Bestinvest) says: ‘For assets owned jointly with another person allowances can be combined so that up to £24,600 of any gain is tax-free in 2021-22. Married couples also have the flexibility to transfer assets to whichever of them is expected to incur the lowest CGT charge.

‘Transfers of assets between married couples – known as interspousal transfers – do not trigger any taxable events and so this is one of the most straight forward ways to maximise tax efficiency.’

Lowery adds: ‘Savers who hold shares outside ISAs – such as for instance those originally acquired through employee “save as you earn” schemes – should think about migrating them into an ISA. Shares acquired through SAYE schemes can be transferred into ISAs within 90 days of the scheme maturing. Otherwise, the approach required is to sell shares owned and then repurchase them within an ISA – a process known as “Bed and ISA”.

‘Care needs to be taken not exceed the annual CGT allowances when doing this, but once in an ISA, all future gains will be tax free.’

Salary sacrifice

There are various schemes that companies run which mean the employee can surrender gross income and receive a benefit or a product instead. They work like your annual allowances to reduce taxable income. Salary sacrifice has been commonly used for employees to buy bicycles for instance (“Cycle to Work”), but it is also offered by some firms as a method of contributing to the pension scheme.

‘In this case, salary sacrifice provides savers with National Insurance relief on top of the usual pension tax relief, making the boost to your pot greater – and can even sometimes mean you drop a tax band if your salary is just over a threshold,’ says Lowery.

Financial gifts

There are a number of tax-free financial gifts that you can make each year. These leave your estate immediately so there won’t be any inheritance tax to pay. These include:

• Gifts to a civil partner, husband or wife (if their permanent home is in the UK)
• Up to £3,000 in gifts each tax year. This can be carried over for one year giving a total of £6,000
• An unlimited number of gifts up to £250 per person
• Wedding gifts to a child of up to £5,000, to a grandchild or great-grandchild of up to £2,500 or to anybody else of up to £1,000

Structuring finances as a couple

If one person in a marriage or civil partnership earns less than the personal allowance (i.e., pays no tax), and the other is a basic rate taxpayer, then the former can transfer £1,260 (2021/22) of their personal allowance to the latter.

This Marriage Allowance can reduce the higher earner’s tax by up to £252 - but also this can be backdated four years if you have been eligible and failed to claim it. This means that in 2021/22 a total tax benefit of £1,220 could be available.

Higham notes that the gifting rule noted above allows married couples and civil partners to transfer assets such as cash and investments between them, without giving rise to any tax liabilities: ‘And that creates numerous opportunities to maximise the use of two sets of tax allowances.’

These are explained in more detail by Louise Higham here

VCTs and other tax-efficient investments

More specialist and higher-risk tax-efficient investments such as venture capital trusts (VCTs) and Enterprise Investment Schemes (EIS) offer generous tax breaks to encourage investment into smaller, younger companies. Because of the risks involved, these are not suitable for everyone but if you are a higher-rate or additional-rate taxpayer who can tolerate a high level of investment risk, you could also consider them.

Our Bestinvest website has more information on VCTs.

Tilney can help you with tax planning

If you’d like help with tax planning, Tilney is here. We offer free initial consultations with a financial planner to give you the opportunity to talk about your specific circumstances and goals and find out more about how we can help you.