Page 4 - Budget 2021

Investors & Savers

The Personal Allowance

The personal allowance was given a standard inflation-linked increase to £12,570 for 2021/22. The announcement of
the minimal uplift was made in November, hidden on page 22 of the Spending Review. For 2022/23 to 2025/26
inclusive the allowance will then be frozen. Many people do not use the current personal allowance to the full and in
2021/22 there will be a gap of just over £3,000 between the allowance and the starting point for National Insurance
contributions (£9,568). At the other end of the income scale, some taxpayers will have no personal allowance in
2021/22 (or future tax years up to 2025/26) because their income exceeds £125,140, at which point their allowance is
tapered to nil.

If you or your partner do not use the personal allowance to the full, 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 £179.60 a week in 2021/22) or the old state pension of
£137.60 a week (if you reached State Pension Age before 6 April 2016).

• 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 married allowance (£1,250 in 2020/21 and £1,260 in 2021/22).

The Personal Savings Allowance

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 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 – no mean achievement 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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