Tax year end – do you need to review your personal finances?

Published by Kim Williams on 25 January 2021

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Do you need to review your personal finances before 5 April 2021? If so, I have detailed the key areas you may want to review here.

ISA allowance

The maximum amount which can be added to an ISA in the tax year 2020/21 is £20,000 and this allowance is to remain the same for the next tax year. Both spouses are entitled to their own allowance, but an unused ISA allowance cannot be carried forward. So, if you do not use your ISA allowance by 5 April 2021 you will lose the opportunity to do so.

Capital gains tax (CGT)

It is important to note that the sale of investment funds can be chargeable to CGT. Each individual has a CGT allowance of £12,300 (2020/21 tax year). If you make other chargeable gains in the year, any gains in your investment portfolio will be added to the other gains made, and the cumulative result could give rise to a charge. If you make a capital loss, this must be first set against gains in the same tax year but any excess loss may be carried forward indefinitely and offset against future gains.

Inheritance tax

On death, each individual has an IHT nil rate band of £325,000 and this is the amount that can be passed on to beneficiaries before a tax charge is due. Any excess is taxed at 40%.

Additionally, there is the Residence nil rate band which allows a further £175,000 (2020/21) to be left to beneficiaries providing certain key requirements are met.

Certain gifts can be made each tax year which will reduce the value of an estate for the purposes of IHT. The annual exemption is £3,000, and if this is not fully used in one year then the balance can be carried forward to the next (total up to £6,000). In addition, gifts up to £5,000 can be made by parents on the marriage of children and £2,500 by grandparents. Any number of gifts of £250 can be made without attracting tax.

Potentially Exempt Transfers (PETs) apply to outright gifts of an unlimited value. These are exempt from inheritance tax after a seven year period has passed and the donor is still living.

Pension contributions

Generally, the maximum pension contribution, on which tax relief can be claimed in a tax year, is £40,000 gross – this includes personal, employer and third-party contributions. This limit can reduce if your income, from all sources, is more than £200,000 in the same tax year.

If you are receiving pension income from a flexi-access drawdown arrangement, then this limit reduces to £4,000.In order to qualify for income tax relief, the maximum personal contribution must not exceed 100% of pensionable earnings, though employer contributions can exceed “cash” salaries subject to wholly & exclusively rules which means the limit may be higher.

If you do not have any earned income, and you are under age 75, you are able to add £3,600 (gross equivalent) to a pension plan and receive basic income tax relief at source.

Pension relief carry forward

The maximum sum which can be saved in a pension scheme over your lifetime without incurring tax charges is £1,073,100 – this amount is set to increase with CPI each tax year and with inflation so low at the moment we will see an increase to £1,078,900 from 6th April 2021.  If all of your pension funds are in excess of this amount (excluding your state pension) you may suffer a tax charge of between 25% and 55%. It may be possible to apply to HMRC for protection if you meet certain criteria.

Defined benefit or final salary pensions are included as part of this calculation, as well as any pensions in payment. We would recommend you seek financial advice in this respect.

Child benefit

The value of child benefit begins to reduce when the income of the recipient or their partner exceeds £50,000 a year, and is completely withdrawn when income reaches £60,000. The value of your income can be reduced by the amount of any pension contribution which may help towards child benefit being recovered.

Personal allowance

Most people are able to have an income of £12,500 in the current tax year before income tax is payable. If your taxable income exceeds £100,000 the personal allowance is reduced by £1 for every £2 of income over £100,000 which means that your personal allowance is lost with income over £125,000. Again, making a pension contribution could help reduce income for this purpose.

To discuss which allowances are available to you or making best use of these with a Financial Planner, please contact Kim Williams on +44 (0)1227 768231 or provide your details on our online enquiry form.

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.

You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.

Kreston Reeves Financial Planning Limited, Independent Financial Advisers. Authorised and regulated by the Financial Conduct Authority.

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