Tax Planning

Private tax planning for 2021/22

As in the rest of the UK, once your total income exceeds £ 150,000 per 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 so the other thresholds are affected accordingly.

Looking ahead, Chancellor Rishi Sunak announced that the personal allowance and all income tax limits for England, Northern Ireland and Wales will be frozen until 2026 and that current income tax rates will remain in place until at least the planned end of Parliament in 2024.

These freezes need to be taken into account as inflation during this period will cause salaries and the cost of living to rise, so people will end up paying a little more tax on their income.

Dividend tax rates and thresholds

Unlike income tax, the tax rates and thresholds on dividends in Scotland are the same as in the rest of the UK.

The dividend allowance remains at £ 2,000 for an additional year, which means an individual can earn up to £ 14,570 tax free in one tax year if they receive £ 2,000 or more from dividends.

The excess dividends are taxed at 7.5% within the base rate, 32.5% within the higher rate and 38.1% within the additional rate.

Remember, you are paid gross dividends, meaning that no tax has been deducted from the amount received. Therefore, taxes will be due if the amounts received exceed your allowances at the end of the tax year.

It is recommended that individuals in receipt of dividend income keep an eye on their dividend income and any subsequent taxes due at the end of the year. If you have a tax advisor, they can help you estimate your tax liability.

Capital gains tax

If you sell or plan to sell taxable assets during the year, such as B. Shares or a secondary home / rental you own may result in a capital gain if the profit on the sale exceeds the Capital Gains Allowance of £ 12,300.

If your profit is higher, the tax rates are 10% in the property tax rate for non-residential property or 18% for residential property and 20% above the property tax rate for non-residential property or 28% for residential property.

When determining your profit from a capital sale, it is worth checking whether there are costs that you can claim as chargeable expenses in order to reduce this profit, for example the upgrading of a property with a winter garden or extension.

Some capital disposals may also be eligible for relief on the sale of business assets (formerly known as Entrepreneurs Relief). Eligible winnings are taxed at a flat rate of 10% regardless of tax bracket, but there is a lifetime limit of £ 1 million on which an individual can claim this relief. All creditable profits after the first million are taxed at the usual capital gains tax rates.

Pensions and savings

Paying in pension contributions can offer tax relief, but the amount that you can pay into a pension and later paid out is limited to life. The lifetime limit has been increased each year with inflation, but similar to the personal allowance, that limit has been frozen at £ 1,073,100 by 2026. This is unlikely to affect most people, but those affected will have to pay a 55% tax if they take any excess income over the next 5 years or 25% if they take the money as income .

As in the previous year, the limit a person can pay into a pension pot while taking a tax break is limited to a maximum of £ 40,000. This limit can be lower for people with higher incomes and this limit can also be lower for those with low incomes. It is advisable to seek professional advice in such cases.

Inheritance tax

Inheritance tax remains essentially unchanged for 2021/22 as estates worth £ 325,000 or less remain tax-free and any excess is taxed at 40%. There was the latest increase in the Residence Nile Rate Band, which means an estate including the family home will benefit from an additional £ 175,000 when passed on to direct descendants. Any further increase in this allowance is determined by the inflation rate (CPI).

As with many other tax exemptions, however, the inheritance tax limits will remain unchanged until 2026.

If a married person dies and leaves their estate to their spouse, the surviving spouse can inherit the tax-free allowance from their deceased spouse and effectively double the allowance they can pass on. For example the tax free allowance of £ 325,000 would be £ 650,000. This also has an impact on the family home allowance which means it would double from £ 175,000 to £ 350,000.

Marriage allowance

For married couples or civil partners, where one person earns less than their personal allowance and the others are within the framework of the basic tariff, it can be advantageous to apply for marriage allowance. This allows the low-wage earner to transfer 10% of his personal allowance to his spouse / partner, so that he can earn a slightly higher amount before paying the tax.

For 2021/22 the transferable amount would be £ 1,260, increasing the other personal allowances from £ 12,570 to £ 13,830. If both people’s income reaches or exceeds their personal allowance, there is no financial benefit to that allowance.

A claim to marriage allowance must be made by the person who wishes to transfer part of their marriage allowance to the other, as this would result in a reduction in personal benefit.

As with all aspects of financial planning, we encourage you to speak to a professional about your situation to ensure that you are getting the most of your current situation and are prepared for any changes that are coming.

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