New tax year 2021/2022: Tax & Allowances
At the start of the new tax year, it is useful to run through the new tax rules and allowances, as well as which allowances will be frozen for the next five years.
The personal allowance, which is the amount you can earn tax-free before you start paying income tax, has risen from £12,500 to £12,570 (as of 6 April 2021).
You will pay basic rate tax (20%) on your taxable earnings between £12,570 and £50,270. This means you can earn up to £50,270 before you start paying higher rate tax (40%).
The additional rate income tax (45%) is charged on earnings over £150,000.
But, bear in mind it was announced in March’s Budget that personal tax thresholds will remain at the new levels until April 2026.
Once you are earning more than £100,000 a year, your personal allowance is progressively reduced. It falls by £1 for every £2 earned over the £100,000 threshold, so anyone earning £125,000 has no personal allowance.
The annual pension allowance remains at £40,000 for the 2021/22 tax year.
Pensions contributions receive full income tax relief; this means it costs basic rate (20%) taxpayers £80 to save £100 into their pension, while higher rate (40%) taxpayers only need to pay £60 to save £100.
The lifetime pensions allowance has been frozen at £1,073,100 until April 2026. For pension savings above this amount, extra tax penalties are incurred, of either 55% (if withdrawn as a lump sum) or 25% (if withdrawn as income).
The allowance has been progressively whittled away over the years, thereby boosting the Treasury coffers as more people’s pensions have breached the threshold and incurred penalties. A decade ago, the allowance stood at £1.8 million.
You can once again save £20,000 into an ISA this tax year. The limit applies to Cash ISAs and Stocks and Shares ISAs. The allowance can be spread between these different types.
You can, if you are under the age of 40, save £4,000 a year into a Lifetime ISA, and this can be used towards the cost of buying a first home or for retirement.
The Junior ISA allowance remains at £9,000. This same limit applies to Child Trust Funds (CTFs).
The tax-free dividend allowance will remain at £2,000 for the 2021/22 tax year.
On dividends received above the £2,000 threshold, basic rate taxpayers pay 7.5% tax and higher rate taxpayers pay 32.5%. Additional rate taxpayers will be charged 38.1% tax on dividend income over the allowance.
The dividend tax does not apply to investments held in an ISA or pension, including a self-invested personal pension (SIPP).
Capital Gains Tax
The capital gains tax allowance will remain at £12,300 until April 2026. This further strengthens the case for utilising tax shelters, such as ISAs and SIPPs.
Lower rate taxpayers pay 10% tax on capital gains, and higher and additional rate taxpayers pay 20%.
The only exception is for second properties, including buy-to-let investments. Capital gains on these investments will be taxed at 18% for basic rate taxpayers, and 28% for higher and additional rate taxpayers.
Capital gains tax is charged on profits from the sale of assets including shares, funds, second homes or buy-to-let properties, business premises, paintings and antiques worth over £6,000, with the rate dependent on the individual’s income and the type of asset sold.
The inheritance tax (IHT) allowance will remain at £325,000 until April 2026. It is payable at the rate of 40% if the value of your estate exceeds the nil rate band (NRB), which is £325,000.
The residence nil rate band (RNRB), or home allowance, is an additional threshold that reduces the IHT payable on your estate and is designed to make it easier for families to pass on the family home.
It stands at £175,000 in 2021/22 and applies if you’re giving away your home to your direct descendants, defined as children or grandchildren including adopted, foster and stepchildren.
Personal Savings Allowance
Following the introduction of the new personal savings allowance in April 2016, basic rate taxpayers can now earn £1,000 from savings before they start paying income tax on savings income.
Higher-rate taxpayers start paying tax on savings income over £500. These allowances remain unchanged for 2021/22. There is no savings allowance for additional rate taxpayers.
Written by Alex Palmer Dip PFS, IFA at Beesure Ltd