Why it’s important to know what’s changing?
A new tax year brings changes, sometimes these changes are small but other times they can impact individual’s income in a larger way. In addition to the usual changes we have also found ourselves in an unprecedented situation due to the COVID-19 pandemic, the financial impact of which will last for many decades.
Therefore it is important to know and understand what is changing and how those changes will impact you, because although these changes may not affect you now, they may in the future.
By understanding these changes it can help you to plan your finances in a more tax efficient manner.
Income tax rates and thresholds for the UK and Scotland
For a couple of years now the tax rates and thresholds for Income Tax have been different in Scotland to the rest of the UK. Therefore how much tax you pay on savings and non-savings income will depend on where you live within the UK.
Examples of non-savings and savings income include salaries, income from pensions, income from land and property, sole trader income and interest.
The tax rates and thresholds on this income for the UK are:
It is important to note that where your total income exceeds £100,000 in a year, your personal allowance will be reduced by £1 for every £2 you earn over £100,000. The Allowance will reduce to £0 if your earnings reach £125,140. This reduction of your personal allowance will impact all of the thresholds accordingly with the exception of the £150,000 additional rate band.
For example, if you earn £145,000 in the tax year you will have no Personal Allowance, you will pay 20% on your first £37,700 and then 40% on everything else from £37,701 to £145,000.
The tax rates and thresholds for Scotland are different, these are:
As with the rest of the UK, once your total income exceeds £150,000 in the year your personal allowance will be reduced by £1 for every £2 you earn over £100,000. This is in line with the rest of the UK meaning the other thresholds are impacted accordingly as a result.
Looking further ahead Chancellor Rishi Sunak announced that the personal allowance and all income tax thresholds for England, Northern Ireland and Wales have been frozen until 2026 and that the current Income Tax rates will remain in place at least until the scheduled end of Parliament in 2024.
These freezes need to be kept in mind as inflation will dictate that salaries and the costs of living will increase in this period so effectively people will end up paying slightly more tax on their income.
Dividend tax rates and thresholds
Unlike income tax, the tax rates and thresholds for dividends are the same in Scotland as they are in the rest of the UK.
The Dividends Allowance remains at £2000 for another year, this means that a person can earn up to £14,570 tax free in a tax year if they receive £2,000 or more from dividends.
The dividends above that allowance are taxed at 7.5% within the Basic Rate band, 32.5% within the Higher Rate band and 38.1% within the Additional Rate band.
It is important to remember that dividends are paid to you Gross, this means that no tax has been deducted from the amount you receive, therefore tax will be due if the amounts received exceed your allowances at the end of the tax year.
It is recommended that people who are in receipt of dividend income keep a track of their dividend earnings and any subsequent tax that will be due at the end of the year. If you have an accountant they will be able to assist estimating your tax liability for you.
Capital Gains tax
If you sell or plan to sell any chargeable assets during the year, such as a shares or a second home/rental property you own, these may lead to a capital gain if the profit from the sale exceeds the Capital Gains Allowance of £12,300.
If your profit is greater than this, then the rates of tax are 10% at the Basic Rate band for non-residential property or 18% for residential property and 20% above the Basic Rate band for non-residential property or 28% for residential property.
When working out your profit on a capital disposal it is worth checking if there are any costs you can claim as an allowable expense to reduce that gain, for example enhancing a property by means of adding a conservatory or extension.
Some capital disposals may also qualify for Business Asset Disposal Relief (previously known as Entrepreneurs Relief). Gains that qualify for this are taxed at a flat rate of 10% regardless of the tax band, however there is a lifetime limit of £1 million that an individual can claim this relief on. Any qualifying gains after the first million will be taxed at the normal rates of capital gains tax.
Pensions and savings
Making contributions to a pension can provide tax relief, however there is a lifetime limit on how much you can contribute to a pension and later withdraw whilst benefitting from this. The lifetime limit used to increase each year with inflation, but much like the Personal Allowance, this limit has been frozen at £1,073,100 until 2026. This likely will not impact most people, however those who are impacted face a 55% tax charge if they withdraw any income above this limit as a lump sum over the next 5 years or 25% if they take the money as income.
As in the previous year, the limit a person can contribute into a pension pot whilst claiming tax relief is capped at a maximum of £40,000. For higher earning individuals this limit may be lower and for low earning individuals this limit may also be lower. It is advisable to seek professional advice in such instances.
Inheritance tax remains mostly much unchanged at its core for 2021/22 as estates worth £325,000 or less remain tax free and any amount exceeding this is taxed at 40%. There has been the final increase to the Residence Nil-Rate band meaning that an estate including the family home benefits from a further £175,000 when being passed on to direct descendants. Any further increases to this allowance will be determined by the rate of inflation (CPI).
As with many other allowances however, the inheritance tax thresholds will remain unchanged until 2026.
Where a married person dies and leaves their estate to their spouse, the surviving spouse may inherit the tax free allowance from their deceased mate effectively doubling the allowance which they may pass on. For example the £325,000 tax free allowance would become £650,000. This impacts the family home allowance as well, meaning that would double from £175,000 to £350,000.
For married couples or civil partners whereby one person earns less than their personal allowance and the others earnings fall within the Basic Rate band it may be advantageous to claim marriage allowance. This allows the lower earner to transfer 10% of their personal allowance to their spouse/partner enabling them to earn a slightly higher amount before paying tax.
For 2021/22 the transferrable amount would be £1,260 which would increase the others personal allowance from £12,570 to £13,830. Where both peoples income is at or exceeds their personal allowance there is no financial benefit to this allowance.
A claim for marriage allowance must be made by the person wishing to transfer part of their allowance to the other as this would mean that their personal allowance is reduced.
As with all aspects of financial planning we would recommend that you speak to a professional about your circumstances to ensure that you are making the most of your current situation and are able to be prepared for any upcoming changes ahead.
Related article - UK Corporation Tax
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