How to make the most of your allowances and exemptions

While 5 April 2022 is fast approaching, there is still time to use your 2021/22 allowances before you lose them.

Pensions

The pension annual allowance

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

When you contribute to your pension, the Government automatically tops up the contribution by the basic rate of 20% and those paying higher or additional rates of tax can claim back another 20% and 25% respectively.

It is also important to be aware of the pension lifetime allowance. This is the maximum amount you can hold in pensions over your lifetime without incurring tax penalties when you take pension benefits. The pension lifetime allowance is currently set at £1.0731 million.

Pension carry forward

If you have used your annual allowance for the current tax year, you may also be able to make extra pension contributions by carrying forward any unused pension allowances from the previous three tax years using pension carry forward.

Pension carry forward can be particularly useful to workers who have inconsistent earnings, such as those who are self-employed or small business owners.

With pension carry forward, it is important to note that your personal contributions are still limited to your salary for the year in which you are making the contributions regardless of how much you have available to carry forward.

Please do bear in mind that as pensions are a form of investment, they carry a level of risk and you could end up with less than you pay in.

ISAs

The ISA allowance is currently £20,000 for adults and £9,000 for children. This is the maximum amount that you can contribute to an ISA during a given tax year. ISAs provide an extremely tax-efficient way of saving as they are free from capital gains tax and income tax.

You can’t carry over your ISA allowance from one year to the next, so if you want to maximise your allowances, now could be a good time to act.

ISAs are also forms of investment and you may get back less than you invest, particularly over the shorter term.

Gains and dividends

Dividend income

All dividends earned within an ISA are tax free, as is income from bonds. But taxpayers also receive an annual £2,000 dividend tax 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 on 6 April 2022.

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 but will increase to 33.75%.

Capital gains tax

Capital gains tax is charged on the profits (or the ‘gain’) you make when you sell or dispose of certain assets, such as a second property, shares and investments (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.

Capital gains tax is only chargeable on the increase in the value of the asset and the capital gains tax allowance is for this tax year is £12,300.

For assets owned jointly with another person, allowances can be combined so that up to £24,600 of any gain is tax-free. Married couples or those in a civil partnership also have the flexibility to transfer assets to whichever person in the couple is expected to incur the lowest capital gains tax charge. Transfers of assets between married couples, known as interspousal transfers, do not trigger any taxable events.

Structuring your finances as a couple

If one person in a marriage or civil partnership is non-taxpayer and the other person is a basic-rate taxpayer (or in Scotland a starter, basic or intermediate-rate taxpayer) then the former can transfer some of their personal allowance to the latter. This is known as the marriage allowance. As the name suggests, only married couples or those in a civil partnership can apply for this and it is not available to couples who are just cohabiting. The marriage allowance is currently £1,260.

This marriage allowance can reduce the higher earner’s tax by up to £252 and this can be backdated four tax years if you have been eligible but haven’t claimed it. This means that in 2021/22 a total tax benefit of £1,220 could be available.

Annual gift exemptions

There are a number of tax-free financial gifts that you can make each during each tax year. These leave your estate immediately so there won’t be any inheritance tax to pay and they are not subject to the seven year rule. 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 tax year giving a total of £6,000
• An unlimited number of gifts up to £250 per person (but no more than £250 per recipient)
• 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

Other tax-efficient investments

Venture capital trusts (VCTs) and Enterprise Investment Schemes (EIS) offer generous tax breaks to encourage people to invest in smaller, younger companies. Because of this, there are substantial financial risks involved, so these are not suitable for everyone and you should seek professional financial advice before making any such high-risk investments*.

Talk to Tilney

If you want to know more about how to make the most of your allowances and exemptions, Tilney can help. Book a no-obligation consultation online or call us on 020 7189 2400.

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Issued by Tilney Financial Planning Limited.

* VCTs and EIS should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon greater than five years. This article does not constitute personal advice.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. If you are in any doubt as to the suitability of an investment, please contact one of our advisers.