Which tax-free allowances do you have?
Updated: Mar 11
As we get closer to the end of the 2020/21 tax year, it’s important to be sure that you’ve taken all possibilities into account for your taxes. When clients come to us, often they have tax allowances which they aren’t using efficiently.
We work with our clients to help them understand what allowances they could be using and create a plan to make more effective use of them. If you’re not sure what tax allowances you could be maximising, read on. We’ve taken a look at the most common allowances below.
Individual Savings Accounts (ISAs) differ from regular savings accounts in that they offer tax-free interest payments.
The ISA allowance is the maximum amount that can be paid into a cash ISA, stocks and shares ISA, or IFISA (Innovative Finance ISA) in the current tax year. In this tax year, the amount is £20,000.
There are also Lifetime ISAs which are dedicated to saving for your first home or retirement only. You can only open one of these if you are 18-39 and can only pay into it until you are 50. The deposit limit for these is £4,000, but it is included in the overall £20,000 limit for all ISAs.
You can also put money into a Junior ISA (JISA) for your child. The allowance for this is £9,000.
There is a cap on the amount you can save tax-free into your pension each year. This cap ranges from £4,000 to £40,000 depending on your earnings. You may also be able to look back over the previous three years and take advantage of any unused allowance during that period.
Pensions can be an especially tax-efficient way to save for the future, but be sure to consider whether you have used, or are likely to use, your full allowance.
The pensions lifetime allowance, how much you are able to save into a pension tax-free over your lifetime, is currently £1,073,100 and will remain at that level until April 2026.
Capital Gains Tax Allowance
The capital gains tax allowance is the amount you are able to profit from the sale or disposal of assets before having to pay tax. This could refer to property, investments or other high-value items. This allowance is £12,300 but you may be able to transfer assets to a spouse to make the most of their allowance.
In the recent budget announcement, it has been confirmed that this allowance will remain the same until 2026.
Personal Tax-free Allowance
Your personal tax-free allowance is the portion of your income that you can earn before being taxed. The allowance during this tax year is £12,500. However, this is gradually lost as your total earnings reach over £100,000. You may be able to reduce your earnings by contributing more to your pension if you have the available allowance.
In the 2021/22 tax year, this amount will rise to £12,570 and is set to remain at that level until April 2026.
Dividend allowance is a certain amount of dividends that you will not need to pay tax on. In the 2020/21 tax year, that amount is the first £2,000. This amount is in addition to the £12,500 personal allowance.
Marriage allowance enables you to transfer some of your personal allowance to a spouse or civil partner. This normally means that the lower earner must earn less than their personal allowance (£12,500 this tax year). Marriage allowance lets the lower-earning partner transfer £1,250 of their personal allowance to the higher-earning partner.
The gifting allowance is the amount that you can give to someone as a gift without having to pay tax on it. Currently, the gifting allowance is set at £3,000 per tax year. This amount is per person, so a couple can gift up to £6,000 tax-free.
Personal Savings Allowance
This is the amount that your personal savings can earn before you need to pay tax on it. This amount can differ depending on your income.
The starting rate for personal savings allowance is £5,000. However, if you earn £17,500 per year, you will not be eligible for the starting rate. Instead, you can earn up to £1,000 in savings interest without having to pay tax. This amount will be based on your income tax band. For example:
Basic rate taxpayers - £1,000 Savings allowance
Higher rate taxpayers - £500 Savings allowance
Additional rate taxpayers - £0 Savings allowance
Inheritance tax threshold
Inheritance tax is only paid on the portion of your inheritance that is above the threshold. The standard inheritance tax rate is 40% and is payable on any amount over the £325,000 threshold. The threshold may change depending on the circumstances, including who receives the remainder of your estate.
To understand what will be payable, it is best to speak to a professional financial planner or adviser.
Blind Person’s Allowance
If you are registered as blind, you can claim this allowance which is an extra tax-free amount added to your personal tax-free allowance. The Blind Person’s Allowance in the 2020/21 tax year is an additional £2,500. If you and your partner both qualify, this amount applies to each of you.
In order to be eligible for this allowance in England and Wales, both of the following must be true:
You’re registered with your local council as blind or severely sight impaired.
You have a certificate that states you are blind or severely sight impaired (or an equivalent document from your doctor).
In Scotland and Northern Ireland, the requirements are slightly different and you will need to confirm whether or not you meet those criteria.
You may also be eligible for other allowances like trading or property allowances if you are self-employed or receive income from a rental property. Both the trading and property allowances have complex criteria for eligibility and use cases. With regard to these, it is often best to speak to a professional who can help you navigate them.
Understanding exactly which allowances you are eligible for can be complicated and this list doesn’t cover all of the possibilities. It’s useful to understand what you may be eligible for to create an efficient tax strategy that could help you plan better for your future.
If you want to know more about which allowances apply specifically to you, speak to a professional adviser.