Key tax allowances like the Personal Allowance and Capital Gains Tax (CGT) annual exempt amount can help your money go further. As research shows that overall tax allowances have been cut, it’s more important than ever to understand what allowances make sense for you, and how they can complement your financial plan.
According to calculations by Quilter, over the last decade, eight key tax allowances have fallen by 6% in total. As many of the allowances have failed to grow in line with inflation, in real terms, tax allowances have shrunk at a much sharper pace.
So, which allowances have changed the most in the last 10 years?
The 2 allowances that have increased since 2012/13
Two important allowances have increased in the last decade, which could reduce how much tax you pay.
1. Personal Allowance
The Personal Allowance is the threshold for paying Income Tax. You don’t pay Income Tax on any income that is below the threshold.
It was £7,475 in 2012/13 and has increased to £12,570 for the 2022/23 tax year – a 68% increase.
2. Capital Gains Tax annual exempt amount
If you’re disposing of some assets, such as stocks not held in an ISA, you may be liable for CGT.
The rate of CGT depends on your Income Tax rate, but it can be as high as 20%, or 28% if you’re selling some types of properties. Making use of the annual exempt amount can minimise how much tax you pay when selling assets.
For the 2022/23 tax year, the allowance is £12,300, up from £8,105 10 years ago.
The 6 tax allowances that have fallen in the last decade
1. Pension Annual Allowance
The pension Annual Allowance is the maximum you can contribute to your pension each tax year while still benefiting from tax relief (not including any “carry forward”). In the last decade, the allowance has fallen by 20% to £40,000 in 2022/23.
Some high earners may have an even lower Annual Allowance if they’re affected by the Tapered Annual Allowance. For every £2 you earn over £240,000 (adjusted income), your Annual Allowance falls by £1 to a minimum allowance of £4,000.
2. Pension Lifetime Allowance
The Lifetime Allowance is the total value your pension can be before you may face additional tax charges when you access it. Over the last 10 years, it’s fallen by 28%. So, how much you can save for retirement tax-efficiently has been significantly reduced.
For the 2022/23 tax year, the Lifetime Allowance is £1,073,100.
3. Money Purchase Annual Allowance
The Money Purchase Annual Allowance (MPAA) affects how much you can tax-efficiently add to your pension if you’ve already withdrawn an income from it. So, it may affect people who have flexibly retired or plan to return to work after taking some time off.
The MPAA is now just £4,000. It was £10,000 a decade ago.
4. Nil-rate band for Inheritance Tax
The nil-rate band is the threshold for paying Inheritance Tax (IHT). If the value of all of your assets is below the threshold, you don’t need to pay IHT. If it’s above the threshold your estate may be liable for IHT at a standard rate of 40%.
The nil-rate band hasn’t changed in the last 10 years and is £325,000 for the 2022/23 tax year. While that may seem positive, when you consider inflation and how the value of assets may have grown, particularly property, it’s fallen in real terms.
5. The Inheritance Tax (IHT) annual exemption
Much like the nil-rate band, the annual IHT gifting exemption is the same as it was 10 years ago. So, in real terms, it’s become less valuable.
The annual exemption is £3,000 for the 2022/23 tax year. This is the amount you can gift each tax year without it potentially being considered for IHT purposes, as it’s considered immediately outside of your estate.
6. Dividend Allowance
Dividends are a common way for investors to generate an income from their portfolio or for business owners to pay themselves.
The Dividend Allowance is how much you can receive in dividends before tax is due. When it was introduced in the 2016/17 tax year it was £5,000, but it’s now just £2,000.
How can you get the most out of your tax allowances?
With some allowances now frozen until 2026, understanding which ones make sense for you and will help cut your tax bill is important. We’re here to help you understand how to use the eight allowances above, as well as others that may be appropriate, in your financial plan.
Please contact us to arrange a meeting with our team.
Please note: This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
The Financial Conduct Authority does not regulate estate planning or tax planning.