So many people aren’t claiming all of the allowances that they are entitled to – don’t be one of them! HB Accountants are on a mission to let people know (and claim what’s rightfully theirs’ to use) all the allowances and tax breaks, to improve the financial future for themselves and for their families – our Tax Manager Amy is here to help
Are you eligible for tax allowances?
Yes. You only pay income tax on taxable income in excess of your tax allowances. Income that is covered by your personal allowance remains taxable income, but it means you will not have to pay any tax on that part of your income. This is important if you need to consider whether or not your income needs to be reported for other purposes, such as tax credits.
There is also a personal savings allowance and a dividend allowance, which are sometimes referred to as the savings nil rate and the dividend nil rate, respectively. Despite their names, they do not work as tax allowances – in effect, they are bands of savings income or dividends which are not subject to tax for specific types of income (that is, savings income and dividend income).
Do you know what your personal allowance is?
The personal allowance is a tax allowance that is available to most people who are resident in the UK. The personal allowance reduces the amount of taxable income on which you pay tax. Income below your personal allowance does not make it tax-free, it just means that you may not have to pay tax on that part of your income. This is important, for example because your eligibility for means-tested State benefits will be affected by your level of total income.
The basic personal allowance is £12,570 for 2021/22. If your income is below your personal allowance, meaning you do not make full use of your personal allowance, you are missing out on your unused allowance. However, you can choose to give up part of your personal allowance in order to give your spouse or civil partner a reduction in their tax bill. This is known as the marriage allowance sometimes known as your transferable tax allowance.
If you are married you need to know about the marriage allowance
The marriage allowance should not be confused with the married couple’s allowance.
The marriage allowance is available to all spouses and civil partners. However, if one of you was born before 6th April 1935, you should claim the married couple’s allowance instead as it will usually be more beneficial.
The marriage allowance for 2021/22 is £1,260. Broadly it enables a spouse or civil partner who is not a higher or additional rate tax payer to give up £1,260 of their personal allowance to provide their spouse or civil partner with a tax credit of £252. The recipient spouse or civil partner also must not be liable to income tax above the basic rate.
Do you pay yourselves dividends? Make sure you understand the dividend tax allowance?
The dividend allowance for the tax year 2021/22 is £2,000. This is a significant reduction from earlier years. For up to £2,000 of dividend income, there is no tax to pay – regardless of how much other income you receive. For higher amounts of dividends, the rate of tax depends on your total income.
If you already complete a self-assessment tax return, you include dividends in this. You declare the total dividends received, even if the amount is less than the dividend allowance.
Learn more about Capital Gains Tax
The capital gains tax allowance in 2021/22 is £12,300, the same as it was in 2020/21. This is the amount of profit you can make from an asset sale this tax year before any tax is payable. If your assets are owned jointly with another person, you can use both of your allowances, which can effectively double the amount you can make before capital gains tax is due. If you are married or in a civil partnership, you are free to transfer assets to each other without any tax being charged.
Take note! If you choose to transfer any of your assets to your partner, bear in mind that if you later sell the asset, you’ll be charged based on the gain made during the period it was owned by you as a couple, rather than since the asset was passed to your partner. If you don’t make full use of your CGT allowance in a given tax year, you aren’t allowed to carry it forward to the next.
Should you think about ISAs?
Individual Savings Accounts, or ISAs, will almost certainly be the most widely recognised investment method on this list. The Government set them up to encourage saving and investment by offering generous tax breaks. With an ISA you can currently invest up to £20,000 a year without paying tax on the investments. Since the introduction of the original ISAs, the government has introduced other types, so that there are now seven and the main four are: Cash ISAs; Stocks and Shares ISAs; Lifetime ISAs; and now, Innovative Finance ISAs (IFISA).
What are your options with Venture Capital Schemes?
You might be familiar with two of the members of this family of tax efficient investment schemes – the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) – as well as having some knowledge of the third, Venture Capital Trusts (VCTs). This group of schemes all offer similar tax reliefs and structures and are designed for tax efficient investment into early-stage businesses to promote growth in the next generation of exciting and innovative businesses.
There are a few ways that investors can use the EIS and SEIS, and the approach used by each investor will vary depending on several factors including the amount to be invested and their aversion to risk. Experienced high net worth investors or ‘angels’ may be happier investing directly into a company and taking an active role, but on the other side, someone new to investing or only looking to invest smaller amounts may prefer to group together with a large group of investors with equity crowdfunding and may use an online platform to invest.
These types of investment offer attractive tax breaks, but are really only suitable for experienced investors.
Do note: your income and capital is at risk and may fall as well as rise. You may not get back the full amount invested, and, for higher risk investment companies, you may get back nothing at all.
Don’t miss out on your allowances!
There’s a good chance that you are not claiming all your available tax allowances to reduce the amount of income tax you have to pay.
We’ve explained the various tax allowances that you may be entitled to, but you should be aware that not all allowances work in the same way. Assessing all of these different allowances can be complex – feel free to get in touch with us and we can help you understand which ones you should be claiming.
Use them of Lose them: Tax Allowances Webinar
Our Tax Manager Amy Armitage and Grosvenor Wealth Management’s David Assor recently held a webinar on everything talked about here to help you understand how you can save tax – you can access the vlog here
HB Accountants is here to help you find optimum tax efficiency: giving you access to experienced accountants, tax specialists and useful information and support no matter your business size or sector. If you would like a no obligation discussion about how we can help you, please feel free to contact the team on 01992 444466. We’re accountants for you and your business and we’re here to help you grow.
The information contained above is for general guidance purposes only. Whilst every effort has been made to ensure the contents are accurate, please note that each individual has different circumstances and it is essential that you seek appropriate professional advice before you act on any of the information contained herein. HB Accountants can accept no liability for any errors or omission or for any person acting on or refraining from acting on the information provided in the above
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