Albert Einstein – the man who brought us the theory of relativity – once said, “The hardest thing in the world to understand is the income tax” and yet, given the complexity of the UK tax system in general, income tax is probably one of the relatively straightforward UK taxes to understand and plan for.
However, although taxes are not always at the top of our list of things to tackle, the recent headlines – including the fact that the UK tax burden is at its highest for 70 years – will only serve to reinforce the importance of the tax year end and, as such, you should ensure you have used all your available allowances and reliefs for 2021/22. To help here, we’ve summarised some of the important tax allowances, exemptions and reliefs, plus the most prevalent tax-efficient investing options, for you to consider, including any recent changes.
Although two reports were published by the Office of Tax Simplification (OTS) in 2020 and in 2021, it is the second paper that the government responded to and only moved forward with five of the 14 changes recommended.
Of these five, most are still being worked through, so just two recommendations have or will soon be implemented. These are:
Additionally, although a further five (on top of the three being worked through) are still being considered, it’s also worth noting that the ‘thorny’ recommendations have been kicked into touch for now. These were that the annual exempt amount be reduced significantly, CGT rates be aligned to income tax rates, the capital uplift on death be removed, and business asset disposal relief, previously known as entrepreneurs’ relief, would be reformed.
It’s also worth remembering that there is still no CGT to pay on personal possessions – also known as chattels – if they are sold for less than a £6,000 profit, or if they are exempt. The list of exempt items, classed as wasting chattels as they have a predictable life of 50 years or less, remains untouched and is worth knowing about as it includes clocks, car and wine, but also most mechanical items.
With the government responding to the OTS 2019 report on the simplification of inheritance tax (IHT) and stating they would not be proceeding with any of the recommendations , we are unlikely to see any major changes to IHT until April 2026 at the earliest.
Among the changes suggested, but not happening, were the introduction of a gift tax, and the abolishing of the under-used, but valuable, exemption of the gifting out of regular income. Often used by our clients, you can also continue to use your annual £3,000 allowance either to gift to one person or split it between several individuals, and it can be carried forward one tax year if you have not used it. Other gifting options are also available, details of which can be found here.
One recommended change that was adopted was to the probate process, which has now been ‘tweaked’ and applies to those administering an estate of someone who died on or after 1 January 2022. Here, the value of the estate now only needs to be reported if you’re applying for probate – the legal right to deal with someone’s property, money and possessions when they die – which is not always necessary.
Beyond this, all other considerations stay the same. The nil-rate band is £325,000, meaning that no IHT will be due on the first £325,000 of any estate, which includes all property, possessions, savings, investments and any other assets, regardless of who they are left to.
And, although any other changes have yet to be announced, it’s worth noting that HM Revenue & Customs (HMRC) consultations are currently underway and changes may be announced – either later this year or early next – with regard to:
If you have a favourite charity, you can consider making your annual gift aid donation before 31 January. Not only does this provide an early benefit to the charity as it starts the year, it also allows you to elect the donation be treated as if it had been made in the previous tax year and accelerate tax relief. It is also worth noting that donors are also able to give assets (e.g. land, property or stocks and shares) to a charity, instead of cash, which would generate income tax relief rather than triggering a CGT bill, and your gift would not be subject to IHT. If you give regularly, you can also contact HMRC to amend your tax code.
For the 2021/22 tax year, adults continue to have an individual £20,000 allowance – a limit that has remained unchanged since 2017. This can be used on either a cash or stocks and shares ISA, and any interest, dividends or capital gains resulting from the investments held in the ‘wrapper’ remain free from CGT and income tax (although not inheritance tax).
And for those aged between 18 and 39, you can save up to £4,000 a year in a Lifetime ISA (LISA), which can be used towards a payment for your first home or would then be earmarked for retirement, given the state adds a cash bonus of up to £1,000/25% a year on top of any contributions you make. And although you can invest more in a LISA, we suggest that you do so in a stocks and shares ISA as this will give you more flexibility, allowing you to access your investments without incurring the penalty linked to LISAs. This 25% penalty applies if you withdraw funds before you’re 60 or if you’re not buying your first property.
Summary of tax allowances, exemptions and reliefs in 2021/22
Basic personal allowance | £12,570 | Tax free income1 |
Capital gains tax exemption | £12,300 | Tax free gains2 |
Personal savings allowance | £1,000 | Tax free income3 |
Dividend allowance | £2,000 | Tax free income |
Pension contributions annual allowance | £40,000 | 20% to 60% tax relief4 |
ISA | £20,000 | Tax free growth |
Junior ISA (JISA) | £9,000 | Tax free growth5 |
Lifetime ISA (LISA) | £4,000 | Tax free growth6 |
Venture capital trusts | £200,000 | 30% tax reducer |
Enterprise investment scheme | £1 million | 30% tax reducer7 |
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Sources: Nedbank Private Wealth; HM Treasury; UK Government; and the Office for Tax Simplification.
We do not offer a tax advisory service and nothing in this article constitutes tax advice. We would always recommend you seek professional tax advice in relation to the impact of any investment structure or transaction on your personal tax position. We are, however, happy to work with your tax advisers, or to provide an introduction to a suitable tax adviser should you wish.
Any examples of investments and structures used are for illustrative purposes only. The inclusion does not constitute an invitation or inducement to buy any financial investment or service. None of the content constitutes advice or a personal recommendation. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.
6 Dec
| 5 mins
Many see Christmas as a time for festivities, others as the time to file tax returns ahead of the 31 January deadline. But while you and Santa are making your lists, and checking them twice, Anna Slater highlights some pointers to help you with UK self-assessment submissions.
31 Jan
| 3½ mins
Most calendars start on 1 January and end on 31 December, but not the UK personal tax year. We explain the history behind the date as the government considers the pros and cons put forward by the Office for Tax Simplification with regard to changing the tax year end date.
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