Don’t forget the new tax year changes

July 29, 2020

With the impact of coronavirus, it’s easy to forget that we passed through a tax year on April 5. As usual, the start of a new tax year saw changes to certain allowances. Many may have gone unnoticed, but they’re worth considering to see if they create an opportunity for you to review your financial plans. Here, Perspective managing director Ian Wilkinson provides a summary of the main changes that came into force

Investments and savings

The Individual Savings Account (ISA) allowance remains at £20,000 for the 2020/21 tax year, but the Junior ISA allowance has been increased significantly to £9000. This allows parents and grandparents to invest further funds for those under 18 years of age.

For those people with savings outside of tax-exempt wrappers, it should be noted that the Capital Gains Tax exemption has increased to £12,300 for individuals and £6150 for trust investments for the 2020/21 tax year.

Pensions

The Lifetime Allowance (LTA) – the limit on the amount of money that can be drawn from your pension before you incur – has increased to £1,073,100. This figure includes all the value of personal pensions as well as final salary/defined benefit pensions you may have, which have a more detailed calculation concerning their value. You should discuss with your adviser if you have additional pension benefits of which we are unaware.

While the main annual allowance remained unchanged for pensions at £40,000, the rules
concerning the tapered annual allowance were amended. This was originally put in place to significantly reduce the allowable pension contributions for high earners, potentially affecting those with earnings in excess of £110,000. This income level was increased from April 2020 and now only has the potential to affect those earning in excess of £200,000.

Inheritance tax (IHT) rates and exemptions

The IHT nil rate band will remain frozen at £325,000 until 2021/2022 as previously announced. However, the residence nil rate band (RNRB) increases to £175,000. This allowance was introduced in 2017 and supplements the existing IHT nil rate band threshold of £325,000. The aim was to offer a total of £1 million of IHT free allowance for couples who owned their own home. It was tapered in with the final taper, which came into effect on April 6, 2020.

Income tax

Personal allowance remains unchanged at £12,500 and the threshold above which higher earners start paying 40 per cent tax is also unchanged at £50,000. These are due to increase in line with consumer price index (CPI) in future years. The National Insurance Contribution Tax threshold was also increased from £8632 to £9500.

General tax issues

Entrepreneur relief has been amended with the Lifetime limit reducing from £10 million to £1 million. Corporation tax remains unchanged at 19 per cent.

While the levels of taxation have remained fairly consistent over the past few years, given the extent of our Government’s borrowing as a result of COVID-19, this is likely to change dramatically and will affect all types of tax. At present, there are some extremely generous tax breaks available, particularly in respect of family businesses, which can be passed on to the next generation free from any CGT and IHT. Although it has been around  since 1976, Business Relief has been changed many times, and has only been at its current 100 per cent level of relief since John Major’s Government increased it April 1996. The cost of both Business and Agricultural relief has come under increasing scrutiny over recent years. As IHT isn’t regarded as direct taxation, I believe that this will become a focus for our Government to help repair the massive black whole which is being created in the UK’s public finances. We have been involved in a number of cases recently in respect of family businesses where the family have made the decision to restructure their business now using the very generous reliefs available. I would strongly recommend that anyone who owns shares in a family business to review their position as a matter of urgency.

As ever, Perspective North East is here to provide advice. If you would like to discuss your current financial planning arrangements in light of any of these changes to make sure you are maximising the opportunities now available to you, please do not hesitate to contact us.

Perspective (North East) Limited
www.pfgl.co.uk

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