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UK Budget 2021 – 6 ways to prepare your finances for the upcoming Budget

As we prepare for an unpredictable UK Budget announcement, here are some top tips to make sure your finances are in as strong a position as possible.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The UK Budget is taking place on 3 March. Chancellor Rishi Sunak will set out his plans for public spending and changes to taxation.

This year there’s an added pressure to address plans for tackling the coronavirus debts, and what will be done to protect jobs for the millions still furloughed.

We can’t be certain what changes will take place, or when they will come. What we do know is this tax year, the Treasury is facing a potential budget deficit of £394 billion for 2020/21.

Although major changes to tax rules on savings and investments are unlikely, you can never rule it out. That’s why it makes sense to make the most of your tax allowances now. The tax environment for investments and pensions are unlikely to get more generous any time soon.

We hope you find this article useful, but it’s not personal advice. If you’re not sure what’s best for your circumstances, please ask for financial advice. As the article shows, tax rules can change and any benefits depend on individual circumstances. Unlike the security offered by cash, investments fall as well as rise in value, so you could get back less than you invest.

Important: If you’re a Scottish taxpayer, different income tax rates and bands apply. Scottish taxpayers need to use the UK tax bands to work out their Capital Gains Tax bill. As well as their entitlement to the Personal Savings Allowance and the amount of tax due on their savings income and dividends.

TIP 1: Don’t miss out on pension tax relief

We don’t expect there to be any announcements about changes to pension allowances or pension tax relief on 3 March. However, with the forecast for government borrowing at the highest level since World War II, we can’t rule it out.

Under the current rules, for anything you pay into a pension the government adds 20% basic-rate tax relief on top. Even if you’re a non-earner, you can pay in up to £2,880 each tax year and get an extra £720 (20%). You just need to be a UK resident under the age of 75 to benefit from tax relief, and you can’t pay in more than you earn (or £3,600, if higher). There’s also a limit called the annual allowance which, for most people, is £40,000 this tax year.

For higher or additional rate taxpayers, the benefits are even more generous. You can claim back up to a further 20% or 25% in tax relief through your tax return. Remember, benefits depend on individual circumstances.

To make the most of this year’s pension allowance, you have until 5 April to top up or think about opening a Self-Invested Personal Pension (SIPP).

Before opening or topping up an HL SIPP, please make sure you’ve read our Key Features. If you’re opening an HL SIPP, you’ll need to read our Terms and Conditions too.

Money in your pension can grow free from UK income and capital gains tax. But you’ll usually need to be at least 55 (57 from 2028) before you can take anything out again. The income you take is taxable.

Quick tax relief calculator

More on the HL SIPP

TIP 2: Make the most of your ISA allowances while you can

Again, we don’t know what will happen to the ISA allowance in future, but at the moment both the adult and Junior ISA allowances are the highest they’ve ever been.

As we’re heading into a time when the government could start tightening their purse strings, you might want to make the most of any allowances while you can.

Each tax year you can pay in up to £20,000 into ISAs and £9,000 into a Junior ISA, as long as you’re a UK resident. This gives your money the chance to grow without it having to worry about UK income and capital gains tax.

MORE ON ISAS

TIP 3: Shelter your dividends from tax

The dividend allowance is £2,000. Any dividends you get above £2,000, outside an ISA or pension, are taxable (based on your income tax band). Over the years we’ve seen big changes to the dividend allowance – three years ago, it more than halved overnight.

It’s likely the dividend allowance won’t stay the same forever. If you’re looking to invest for the long term, you might want to think about an ISA over other investment accounts for this reason.

But if you’ve maxed out your ISA allowance, you could think about investing in your pension instead. It’s worth remembering though, you’ll usually pay income tax on any withdrawals you eventually take from your pension. You’ll also need to be at least 55 (57 from 2028) before you can take the money out.

TIP 4: Take advantage of this year’s capital gains tax allowance

This year you can realise a gain of £12,300 before you pay Capital Gains Tax (CGT). The allowance has been gradually rising for decades, but there are no guarantees it’ll continue to do so. The rates you pay on gains have also been through three significant changes in that time, so rates aren’t guaranteed to remain the same either. If you have existing investments, it’s always worth considering your CGT allowance each year, and whether it makes sense to use it.

Guide to capital gains tax

TIP 5: Don’t neglect your cash savings

The personal savings allowance (PSA), combined with low interest rates, has meant savers are probably thinking less about the risk of tax on cash savings.

Since the rule changes introduced in 2016, most people can earn interest from their savings without paying tax. Basic-rate taxpayers can receive up to £1,000 interest tax-free. For higher rate taxpayers it’s £500 a year.

Additional-rate taxpayers don’t get any tax-free allowance. If you have significant savings and the allowances change, or you were to change tax brackets and lose some of your allowance, you could end up with an unexpected tax bill.

If you’re not planning to max out your ISA allowance this year, you could think about using it for cash savings. You can save money in an ISA tax-free, regardless of your tax status. Putting money in an ISA doesn’t mean it’s less accessible either. You can withdraw your money whenever you need to.

TIP 6: Make the most of being married

Spouses or civil partners are treated as separate individuals when it comes to CGT. Each person has their own CGT allowance (£12,300), and transfers between spouses and civil partners are exempt from CGT. This means couples can have a combined CGT allowance of £24,600, and share assets between them without triggering a capital gains tax bill.

Marriage Allowance is another tax perk. If you qualify for it, it also makes sense to claim it while you can. It’s available to couples who are married or in a civil partnership.

The lower earner can transfer up to £1,250 of their personal allowance to their partner, provided they don't pay tax at the higher rate. As it stands, this can be backdated for four years, so you can make a claim worth over £1,000 in the first tax year you use it.

More on the marriage allowance


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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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