The new tax year started this week, and there are a number of changes coming in that will affect millions of people. Chancellor Rishi Sunak announced changes to the likes of Personal Allowances and Pensions in his Budget last month.
Here are all the changes you need to know about.
Personal allowances and tax thresholds
The personal allowance is the amount you can earn from your salary – whether you’re employed or self-employed – before having to pay income tax. For 2021-22, this is increasing from £12,500 to £12,570.
If you earn more than the personal allowance, you’ll have to pay income tax. If you live in England, Northern Ireland or Wales your earnings will fall into these three tax bands (there are different income tax bands and rates in Scotland):
20% basic-rate: £12,571-£50,270
40% higher-rate: £50,271-£150,000
45% additional-rate: £150,000+
You’ll start to lose your personal allowance once you earn more than £100,000 – regardless of where you live in the UK. For every £2 you earn over £100,000, you’ll lose £1 of the personal allowance, meaning that by the time you earn £125,140 you’ll have no personal allowance at all and will be taxed on your whole income.
These brackets will then be frozen for five years.
National Insurance thresholds
Note that you’ll also have to pay National Insurance contributions (NICs) out of your salary; the rates and thresholds are different to income tax, and what you pay depends on whether you’re employed or self-employed.
Employees pay Class 1 NICs, charged at 12% when you earn between £9,568 and £50,270. In 2020-21, these were payable on earnings between £9,500 and £50,000. You’ll pay 2% on earnings above £50,270.
Self-employed workers may need to pay Class 2 and possibly Class 4 NICs on their profits. Class 2 is a payment of £3.05 a week (unchanged from 2020-21), on profits between £6,515 and £9,568. You’ll pay Class 4 NICs of 9% on profits between £9,568 and £50,270, and 2% on profits more than this – in addition to Class 2.
Dividend allowance remains at £2,000 The tax-free amount you can earn from dividends in 2021-22 is sticking at £2,000, where it’s been for several years. You might earn dividends as part of your income if you have invested in company shares, but you’ll only be taxed if you earn more than £2,000 in the same tax year – and the tax rates are different to other income. The rate you’re taxed depends on your income tax band: Basic-rate taxpayers: 7.5% Higher-rate taxpayers: 32.5% Additional-rate taxpayers: 38.1%
Capital gains allowance remains at £12,300
Ahead of the Budget, there were lots of rumours about possible capital gains tax (CGT) reforms, but instead, everything about the tax was kept the same for 2021-22. The capital gains allowance refers to the amount of profit you can earn from selling valuable items before having to pay tax on it. If you own assets jointly with your spouse, you can effectively pool your allowances – so, together, you’d have £24,600 for 2021-22.
If you exceed the allowance, the amount of tax you’ll pay depends on your income tax band and what you’ve sold, as property is taxed at a higher rate than other valuable items. Basic-rate taxpayers pay 10% on assets and 18% on property, while higher- and additional-rate taxpayers pay 20% on assets and 28% on property. Any losses can be offset against your gains to reduce your tax bill.
Marriage allowance is increasing to £1,260
If you’re married or part of a civil partnership, you may qualify for the marriage allowance.
This tax break is for couples where one partner earns less than the personal allowance (£12,570 in 2021-22), and the other is a basic-rate taxpayer (earning between £12,571-£50-270 in 2021-22).
By claiming marriage allowance, it essentially means that the lower-earning partner can transfer 10% of their personal allowance to the partner that earns more – effectively boosting their personal allowance to £13,830. This means the higher earner can keep more of their salary before income tax kicks in, boosting the couple’s finances – in real terms, it means earning an extra £252. However, it’s also worth bearing in mind that you can also backdate your claim for up to four years, meaning you could get a hefty rebate.
Trading allowance of £1,000
If you earn a small amount from things like selling items on eBay, or making items to sell on Etsy, the £1,000 trading allowance could be useful. As long as this income remains below £1,000, you won’t need to inform HMRC about it – but if you exceed £1,000 you’ll need to declare it on a self-assessment tax return.
Property allowance of £1,000
In a similar theme to the trading allowance, the property allowance means you can earn up to £1,000 from your property without having to report it to HMRC.
This won’t cover much of what you’d earn from renting a room – so the Rent-a-room scheme below is a better bet – but it may be useful if you rent out your parking space, for instance, or earn a little from using your house or garden for photoshoots.
Earn up to £7,500 with the Rent-a-room scheme
The Rent-a-room scheme threshold is remaining at £7,500 for 2021-22, where it’s been for several years. This is the amount you can earn tax-free for letting a room in your home. This only applies to the property you live in; buy-to-let properties are excluded.
If you earn more than this threshold, you must submit a self-assessment tax return and declare the income.
Get up to £6,000 tax-free savings interest
Depending on your income, you may be able to earn up to £6,000 in savings interest before having to pay tax on it. You can do this through combining the £5,000 savings starting rate and £1,000 personal savings allowance – but only those who earn less than the personal allowance can take full advantage of this.
For each £1 you earn over the £12,570 personal allowance, you’ll lose £1 from the £5,000 savings starting rate – so if you earn more than £17,570 you won’t have any of it left.
However, the £1,000 personal savings allowance is available for all basic-rate taxpayers (who earn less than £50,270); this reduces to £500 if you pay higher-rate tax (between £50,270 and £150,000). Additional-rate taxpayers don’t receive any personal savings allowance.
Save on tax with an ISA
If the interest you earn on your savings exceeds the personal savings allowance, or you’re an additional-rate taxpayer and don’t receive this allowance at all, you could cut your tax bill with an ISA.
The ISA allowance for 2021-22 is remaining at £20,000, which is the total amount you can pay into one or a mix of ISAs. You’re only allowed to pay into one of each type of ISA, including cash ISAs, stocks and shares ISAs, innovative finance ISAs and lifetime ISAs, but you can split the allowance however you like – although you can only pay up to £4,000 into a lifetime ISA.
All money held within an ISA remains tax-free, including interest.
Universal Credit will see a slight uptick from 12 April, in addition to the £20 Covid uplift. The increases are as follows:
Under 25 and single – £256.05 to £257.33
Over 25 and single – £323.22 to £324.84
Joint claimants both under 25 – £401.92 to £403.93
Claimants caring for a disabled person – £162.92 to £163.73
Advance payments now can be paid back over 24 months, rather than 12
From 12 April the state pension will increase by 2.5 per cent a week.
This means people over the age of 66 on the full state pension will receive £179.60 per week, representing a £228.80 rise for the financial year.
Child benefit is rising from £21.05 to £21.15 per week for people with one child from 12 April.
For people with more than one child, it is rising from £13.95 to £14 for each subsequent child.
Pension credit payments will rise from £173.75 to £177.10 from 12 April.
These payments are to help with living costs for people of retirement age who are on a low income. You can get extra help if you’re a carer, severely disabled, or responsible for a child or young person.
Working tax credits
The Covid uplift to working tax credits has now ended. However, if you receive working tax credits you will get a one-off £500 payment, which you should receive on 23 April.
Housing benefit is rising from £58.90 to £59.20 for under-25s, and from £74.35 to £74.70 for 25s-and-overs, starting from 6 April.
Personal independence payments (PIP)
PIP is rising to £89.60 (from £89.15) for enhanced claimants and £60 (from £59.70) for standard claimants.
The PIP mobility component is rising to £62.55 (from £62.25) for enhanced and to £23.70 (from £23.60) for standard payments.
Statutory sick pay
Statutory sick pay will rise to £96.35 a week from 6 April. The amount you need to earn to qualify for this will remain at £120 a week.
The Chancellor is bringing back 95 per cent mortgages from 19 April, which he hopes will make it easier for people to get on the property ladder.
The Government has said it will pay banks or building societies if a person is unable to meet their repayments, which has led to the likes of Lloyds, Barclays, Santander and HSBC signing up to offer the mortgages.
From 6 April, people on maternity, paternity, adoption and shared parental leave will receive a maximum £151.97 a week after the first six weeks, up from £151.20.
Statutory maternity pay lasts up to 39 weeks, made up of:
Six weeks getting 90 per cent of your average weekly pay (before tax)
33 weeks getting either £151.97 a week or 90 per cent of your average weekly pay (before tax) – whichever is less
Disability living allowance
The maximum disability living allowance payment is rising from £89.15 to £89.60.
The lowest payment is rising from £23.60 to £23.70, and the middle bracket is going up from £59.60 to £60.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. How you're taxed will depend on your circumstances, and tax rules can change. ISA rules apply. A Lifetime ISA isn't for everyone. If you withdraw money before age 60, unless it's to buy your first home, you'll pay a government withdrawal charge of 20%. And if you choose to save in a Lifetime ISA instead of enrolling in, or contributing to, your workplace pension scheme, you'll miss out on your employer’s contributions.
This article is for information purposes only and are not a personal recommendation or advice.