Preparing for the tax year ahead | Living North

Preparing for the tax year ahead


When organising your finances, making the most of the various allowances ahead of the tax year end (5th April) is key. Here we discuss the main annual allowances and the advantages of making the most of these

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At Sandringham Financial Partners – Darlington, tax efficiency is fundamental within a client’s financial plan. Please note this article is not intended to constitute financial advice. An individual’s tax position is always determined by their particular circumstances and we strongly recommend that you consult a professional adviser before you commit to any financial transaction.

The income tax personal allowance will often be utilised fully by your salary. However, where you or your spouse/civil partner have limited taxable income, this can be a valuable tax allowance to make the most of. For the 2020/21 tax year the standard tax-free personal allowance is £12,500. This can be altered for several reasons, for example, adjustments for over or underpaid tax in previous years. If you have earnings of less than £12,500 you might be able to draw income from taxable sources and for this to still be tax free as it falls within your personal allowance.
The marriage allowance enables you to pass 10% of your personal allowance to your spouse/civil partner, provided they are a basic rate taxpayer. For maximum impact you must be earning £11,250 or less. This saves the spouse up to £250 in income tax. It’s also possible to back date your claim to 5 April 2016, where eligible.

It can be good practice to use your Capital Gains Tax allowance of £12,300 for the 2020/21 tax year, in respect of direct investments. Where the asset is held jointly claiming both parties’ potentially achieves a tax-free gain of £24,600. Keep in mind that any liability to capital gains tax is calculated in the year in which the gain is made. Using your Capital Gains Tax allowance to fund a subscription to your ISA (see below), a process known as ‘Bed and ISA’ can be a useful way of improving the tax efficiency of your portfolio.

The 2020/21 ISA allowance is £20,000. Funds are free from Income Tax or Capital Gains Tax. This applies to Stocks and Shares, Cash, and Innovative Finance ISAs. You can pay the full allowance into one account or split across the different account types. You cannot subscribe to more than one of each type of account in the same tax year. For example, you cannot pay into 2 different stocks and shares ISAs in the same tax year. The limit for Lifetime ISAs is £4,000 and you can contribute until age 50. The £4,000 allowance counts towards your overall £20,000 allowance. A Lifetime ISA benefits from a 25% increase to your contributions (up to a maximum of £1,000). You can withdraw funds without penalty if you’re buying your first home, are aged 60 or over or are terminally ill. You will pay a withdrawal charge of 25% if drawing assets for any other reason. The withdrawal charge has temporarily been lowered to 20% until 6th April 2021.

The pension annual allowance limits how much you can pay into a pension and receive tax relief on. In 2020/21 this is £40,000 gross or an individual’s relevant earnings, whichever is lower. Relevant Earnings for pension purposes generally exclude income or dividends from savings or investments, income from pensions or property rental
income. For many individuals who are higher rate taxpayers whilst in employment it is likely that, through careful tax planning and simply a reduction in overall income, they will be a basic rate taxpayer in retirement. Therefore receiving higher rate tax relief on contributions going in with only basic rate payable on the taxable element coming out, offers a significant incentive.
Finally gifts. You have an annual gifting allowance of £3,000. If Inheritance Tax is a concern, utilising this allowance can be a useful way of making a small but regular gift with no IHT consequences. This gift can be made to anyone and can be back dated one year if you have not made any gifts in the tax year before. 

If you would like to discuss your situation ahead of the end of the tax year in April, please do get in touch on 01325 808075 or at Alternatively, please visit us online at As a special offer for Living North readers we are offering a no cost, half hour end of tax year consultation.

Published in: February 2021

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