The 2020-21 Tax Year: A Summary Of New, Key Changes
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincoln or other local offices.
As we begin a new tax year (2020-21), it would be easy to miss the key changes which might affect your financial plan. Here at Castlegate, our Lincolnshire financial advisers wanted to offer this short guide summarising some of the highlights from Chancellor Rishi Sunak’s budget in March, as well as new measures which came into force on the 6th April 2020.
We hope you find this content useful and informative. If you would like to discuss your own financial plan, please get in touch to arrange a no-obligation consultation, at our expense:
The state pension
In the previous tax year (2019-20) the full new state pension could bestow a maximum of £168.60 to each person, per week. In 2020-21, however, this has been raised to £175.20. This is clearly a development which many people will welcome for their retirement plan.
However, it’s important to bear in mind that this increase is intended to match the rising cost of living. As such, whilst the amount of state pension you receive might look higher “on paper”, be careful not to simply use this as a licence to exceed your spending plan in retirement.
Remember, to receive the full new state pension you must accrue at least 35 years of qualifying National Insurance contributions (NICs). You also need, at minimum, 10 qualifying years on your NI record to receive anything at all. Speak to a financial adviser here at Castlegate if you require pension advice and information regarding this important area of retirement planning.
There was a lot of speculation in early 2020 that then-Chancellor Sajid Javid was going to cut pensions tax relief for higher earners; possibly from 40% (currently enjoyed by Higher Rate taxpayers) to 20% which is applied to those on the Basic Rate. Suffice to say, this proposal was not implemented. However, the new Chancellor (Rishi Sunak) has introduced a new set of rules for the pension annual allowance, which might well affect you in 2020-21.
In 2019-20, the rules were that you could contribute up to £40,000 per year into your pension each year (or up to 100% of your salary; whichever is lower), assuming you had not triggered the Money Purchase Annual Allowance rules. For every £2 earned over £150,000, however, your allowance would be lowered by £1 to, at most, £10,000. Unfortunately, this had the effect of punishing senior doctors and other medical professionals, who saw their pension contributions getting highly taxed if they worked overtime.
In 2020-21, however, this “taper” to your annual allowance will not start until your “adjusted income” exceeds £240,000. This will likely take away some of the financial disincentives for medical workers to work overtime (very important during this time of COVID-19 pandemic). Bear in mind, however, that the maximum reduction is no longer £10,000 per year, but £4,000. As such, those earning more than £240,000 should consider speaking to a professional financial adviser, to ensure they optimise their tax position.
One of the biggest announcements in the March 2020 budget was the change to Entrepreneurs’ Relief. In 2019-20, this relief allowed a business owner to sell his/her business for up to £10m, and pay a 10% rate of capital gains tax (CGT) instead of 20%. In this 2020-21 tax year, however, the Chancellor has reduced Entrepreneurs’ Relief by 90%, meaning that it now only applies to sales up to £1m.
The government’s reasoning for this change is that 75% relief was previously only benefitting about 5,000 people, it cost billions and the scheme was not incentivising enough people to start and grow their own business. Regardless, this change could plausibly affect many M&A deals, as well as owners’ plans for future sales. After all, many business owners plan to use the sale of their business to help fund their retirement. It might be worth speaking to a financial adviser about your options, since it might make sense to extract more value from the business before you sell it (e.g. through company pension contributions).
For those who are self-employed in a contractor role, there has been a lot of discussion and nervousness about the government’s plans to change how tax returns are filed. To briefly recap, in 2019-20 the responsibility primarily lay on contractors to assess the “IR35 status” of their assignments. Proposals were put forward to shift this responsibility to those hiring contractors, to try and reduce tax avoidance by contractors working as “disguised employees”. This change was originally planned to come into full force in April 2020, but has been delayed in light of the COVID-19 outbreak.
At present, there will be an IR35 private sector update in April 2021. This gives contractors plenty of time to consult a professional tax or financial adviser, to ensure your business financial plan is ready for the updated rules and getting the best tax deal out of them.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense: