With the UK under lock-down, people stuck at home could easily forget what day it is, let alone remember that it’s now the start of the new financial year. As is customary, this is the time when most regular financial updates take effect and it generally brings a sprinkling of minor tweaks to tax issues. Here is a quick summary of what’s on the cards for tax year 2020/2021.
The state pension goes up
So far the Conservatives have stuck with the “triple-lock guarantee” which ensures that the State Pension has an annual increase of inflation, average earnings or 2.5%, whichever is the higher. This year it’s average earnings, so state pensioners get an increase of 3.9% to £134.25 a week or £175.20 a week, depending on whether they’re on the old or new state pension.
Higher earners can save more into their pensions
While the increase in the state pension is welcome, it’s probably not the stuff of which retirement dreams are made. Those who want to supplement it (or who don’t want to take it on trust that the state pension will still be around when they are ready to retire) can now pay more into their private pensions.
From April 6th 2020 people can earn up to £240,000 before their annual pension savings allowance starts to be reduced. This is more than double the previous limit of £110,000. The pensions savings allowance itself remains the same at £40,000 per year.
Somewhat ironically, part of the reason for this decision was to encourage doctors to take extra shifts rather than turning them down due to the impact of losing their pension allowance. The move was announced long before the arrival of COVID19, but it still seems a timely change.
The lifetime pension allowance has been raised to keep alongside inflation, it is now £1,073,100. If you withdraw more than this from your pension over the course of your lifetime, you will trigger a tax penalty. Currently, this can be up to 55% of the excess.
The National Insurance threshold goes up
National Insurance now comes into place if you earn a minimum of £9,500, which is a substantial increase from the previous threshold of £8,632. Alongside this, the government has postponed the extension of its controversial IR35 “off-payroll” rules to the private sector. They remain in force for the public sector.
The intent of IR35 is to prevent companies from hiring people who are effectively employees but who are treated as contractors and paid through limited companies. This allows the contractors to receive their income from dividends and hence effectively makes them exempt from National Insurance.
The rules have, however, been widely criticized as making people pay National Insurance as though they were employees, but not giving them the same benefits as employees. It will be interesting to see if the issues highlighted by COVID19 will lead to a rethink of National Insurance payments for the self-employed.
The Junior ISA allowance increases
If you want to save for junior through an ISA, you can now put away £9000 a year, which is more than double the previous allowance of £4,368 a year. Once your child reaches 16 they can also open a regular ISA, albeit only for cash (not stocks and shares), so you can save into both together for a couple of years, to give them a final boost on their journey towards adulthood.
Just remember, however, that the money in a regular ISA belongs to your child from the moment it is put into their name and the money from a Junior ISA becomes theirs completely on their 18th birthday. This means that if you want to exercise control over how they spend your contributions, you will need to look at other options, e.g. setting up a trust.