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Tax year

The current tax year runs from the 6th April 2020 to the 5th April 2021.

Personal Allowance

Your personal allowance is the amount you can earn tax-free before you must pay income tax.  It is £12,500 for the 2019-20 tax year (unchanged from the previous tax year).  Pensioners will not receive a higher personal allowance than other age groups.

You pay basic rate tax of 20% on your taxable income between £12,501 and £50,000. You pay higher rate tax of 40% on your taxable income above £50,000.

If you earn £100,000 or more, your tax-free personal allowance falls by £1 for every £2 you earn over £100,000. So if you earn £125,000 or more, you won’t receive any tax-free personal allowance.

You pay additional rate income tax of 45% on earnings above £150,000.

Rent-a-room tax allowance

If you are a homeowner or a tenant with a rental lease that allows you to rent out a room, you can earn £7,500 rental income tax free in this tax year from lodgers, or £3,750 each if you are letting out your home in conjunction with someone else.

Property and trading income tax allowance

Micro-entrepreneurs can earn up to £1,000 of income free of tax from both property and trading, e.g. selling goods on eBay. This first came into effect during the previous tax year.

The starting rate for savings if you’re on a low income

The starting rate for savings is aimed at supporting savers on the lowest incomes.

For the 2020-21 tax year it is £5,000.  This means that up to £5,000 of the interest received from savings is tax-free.  You can earn up to £17,500 a year and still be eligible for the starting rate for savings.

Personal savings allowance

Since April 2016, basic rate taxpayers can now earn £1,000 income from their savings tax free. Higher rate taxpayers will only start paying tax on savings income above £500.

These allowances remain unchanged for the 2020-21 tax year. There is no savings allowance for additional rate taxpayers.

ISA Allowance

You can invest up to £20,000 in ISAs during this tax year.  You’re allowed to split this allowance any way you like across a Cash ISA, Stocks and Shares ISA, Lifetime ISA (maximum of £4,000) and an Innovative Finance ISA. For example, you could put £6,000 in a Cash ISA, £10,000 in a Stocks and Shares ISA and £4,000 in a Lifetime ISA in this tax year.

NOTE:  you CANNOT contribute to a Cash ISA in the same tax year as contributing to a Help to Buy ISA.

 

 

Dividend taxes

The dividend is £2,000 for everyone.

This can be added to your personal allowance though, so if you only have income from dividends, you’ll be able to earn £14,500 tax-free.

If your dividends exceed the allowance of £2,000, basic rate taxpayers will pay 7.5% tax on dividends while higher rate taxpayers will pay 32.5% and additional rate taxpayers will pay 38.1%.

These changes are not applicable to any shares you hold in an ISA or a pension.

Capital Gains Taxes

Every year you can take advantage of your capital gains tax allowance before you start paying capital gains tax.  In 2020-21, your capital gains tax allowance is £12,300 (up from £12,000 in 2019-20).

On any capital gains above your allowance, basic rate taxpayers pay a tax of 10% and higher and additional rate taxpayers both pay 20%.

The only exception to this is when you sell a second property, including a buy-to-let property. Capital gains on these investments will be charged at 18% for basic rate taxpayers and 28% for both higher and additional rate taxpayers.

National insurance – employees

While most people won’t pay income tax on the first £12,500 they earn, employees will need to pay national insurance once they are earning £183 a week.

This is payable at a rate of 12% for earnings between £183 and £962 a week (or £9,516 to £50,024 a year). This falls to 2 per cent for earnings above this threshold.

National insurance – self-employed workers

Self-employed workers who make more than £6,475 a year need to pay class 2 national insurance contributions (NICs). These are a flat rate of £3.05 per week (or £158.60 a year), regardless of how much you earn. If you earn less than this, you can make voluntary contributions.

Voluntary contributions might be necessary if you have gaps in your national insurance record as you currently need 35 years of national insurance contributions to get the maximum state pension at retirement age.

Self-employed workers who make more than £9,500 a year, will pay class 4 contributions of 9% of profits between £9,500 and £50,000 per year, plus 2% of any earnings above this.

Pensions

Pensions contributions receive full income tax relief, i.e. it only costs basic rate taxpayers £80 to save £100 (20% tax relief), while higher rate taxpayers only need to pay £60 to save £100 (40% tax relief).

There have been no major changes to the pension allowances this tax year.  This means that most people will be allowed to pay up to £40,000 into their pension this year.

However, if you earn more than £200,000 (£110,000 in the previous tax year), i.e. your ‘threshold income’, and your ‘adjusted income’ is more than £240,000 (£150,000 in the previous tax year), then your annual allowance starts to fall by £1 for every £2 adjusted income.  This is known as the ‘tapered annual allowance’.  Adjusted income is your total taxable income, i.e. your salary, dividends, rental income, savings interest, plus employer pension contributions.

E.g. for those with total income over £300,000, the annual allowance gradually falls from £10,000 to £4,000 meaning that it is £4,000 only for anybody earning in excess of £312,000.

The lifetime pensions allowance has been increased for the 2020-21 tax year to £1,073,100 from £1,055,000 last year.

It’s ideal when you want to calculate how much you need to save / invest every month to e.g. buy a car, put a deposit down on a house, etc.  All you need to know is the following:

1. Interest rate per annum.
2. Your savings goal / target.
3. Period, in months, you will be saving for.

It’s easy to use, simply complete the blue shaded areas.

It’s ideal when you’re considering buying a house and want to see what sort of mortgage repayment you can afford.  You can also use it to calculate a repayment on any other type of debt e.g. personal loan, credit card, etc.  All you need to know is the following:

1. The purchase price.
2. Deposit, if any.
3. The period of borrowing.
4. The interest rate being charged.

It’s easy to use, simply complete the blue shaded areas.