Page 4 - Budget Newsletter 2021

Investors & Savers

The Personal Allowance

The personal allowance was frozen at £12,570 in the March 2021 Budget and will remain at that level until the end of
the 2025/26 tax year. Had it received the normal inflationary increase, the allowance for 2022/23 would have risen to
£12,960. Many people do not use their personal allowance to the full and in 2022/23 there will be a gap of almost
£2,700 between the allowance and the starting point for NICs (£9,880 in 2022/23). At the other end of the income scale,
some taxpayers will have no personal allowance in 2022/23 (or future tax years up to 2025/26) because their income
exceeds £125,140, at which tapering, which starts at £100,000, reduces their allowance to nil.

If you or your partner do not fully use the personal allowance, you could be paying more tax than necessary. There are
several ways to make sure you maximise use of your allowances:

• Choose the right investments: some investments do not allow you to reclaim tax paid while others are designed to
give capital gain, not income.

• Couples should consider rebalancing investments so that each has enough income to cover their personal
allowance.

• Make sure that in retirement you (and your partner) each have enough pension income. On its own, state pension
provision is not enough, be it the new state pension (up to £185.15 a week in 2022/23, based on September
inflation data) or the old state pension of £141.85 a week (if you reached your state pension age (SPA) before 6
April 2016 and also based on September data).

• If one of you pays tax at no more than basic rate and the other is a non-taxpayer, check whether it is worth
claiming the transferable marriage allowance (£1,260 in 2021/22 and 2022/23).

The Personal Savings Allowance (PSA)

The personal savings allowance (PSA) first appeared in April 2016 and has been unchanged since then. Broadly
speaking, if you are a:

• basic rate taxpayer, the first £1,000 of savings income you earn is untaxed;

• higher rate taxpayer, the first £500 of savings income you earn is untaxed;

• additional rate taxpayer, you do not receive any personal savings allowance.

‘Savings income’ in this instance is primarily interest, but also includes gains made on investment bonds, including
offshore bonds. Although called an allowance, the reality is that the PSA is a nil rate tax band, so it is not quite as
generous as it seems. The PSA means that banks, building societies, National Savings & Investments (NS&I) and UK-
based fixed interest collective funds all pay interest without any tax deducted, but they do report payments to HMRC.
Thus, if your interest income exceeds your PSA – which needs a substantial amount of capital at current interest rates
– you could have tax to pay. Be warned that if you do not tell HMRC, it will have the data to tell you.

If you and your spouse/civil partner receive substantial interest income, it is worth checking that you both maximise
the benefit of the PSA. However, at today’s ultra-low interest rates you might also want to consider whether you
could earn a higher income by choosing non-deposit-based investments.

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