The new financial year begins in April 2020, and with a new financial year comes new personal and business tax changes to be aware of – although some allowances will be staying the same. Here’s how these tax allowances will affect you in 2020/21.
Tax Changes at a glance
Personal Allowances, Income Tax and Pensions
| 2020/21 | 2019/20 | |
| Personal Allowance | £12,500 | £12,500 |
| Basic Rate Tax Band | 20% on income between £12,501 and £50,000 | 20% on income between £12,501 and £50,000 |
| Higher Rate Tax Band | 40% on income between £50,001 and £150,000 | 40% on income between £50,001 and £150,000 |
| Additional Rate Tax Band | 45% on income above £150,000 | 45% on income above £150,000 |
Income Tax
Personal Allowance is the amount you earn before you start paying Income Tax. In 2019/20, the standard Personal Allowance was £12,500. In 2020/21, the standard Personal Allowance remains at £12,500.
The threshold for the Higher Rate of Income Tax at 40% remains at £50,000 for 2020/21. The threshold for the Additional Rate of Income Tax at 45% also remains at £150,000 for 2020/21.
The income limit for Personal Allowance remains at £100,000 for 2020/21.
National Insurance Contributions increase in 2020/21
For 2020/21, the Class 1 National Insurance threshold is increasing from £8,632 to £9,500 a year, which will leave most taxpayers £100 better off for the year. So, if you earn between £9,500 and £50,000 before tax and pension deductions, you will pay NICs at 12%. Earn less, and you will not pay any National Insurance contributions. On earnings above £50,000, you will pay National Insurance at 2%.
National Minimum Wage and National Living Wage increase in 2020/21
| Minimum hourly rate | 2020/21 | 2019/20 |
| For employees aged 25 and above | £8.72 | £8.21 |
| For employees aged between 21 and 24 | £8.20 | £7.70 |
| For employees aged between 18 and 20 | £6.45 | £6.15 |
| For employees under 18 | £4.55 | £4.35 |
| For apprentices of all ages | £4.15 | £3.90 |
From 1 April 2020, the National Minimum Wage and National Living Wage is increasing. The minimum hourly wage depends on worker status and age:
- For employees aged 25 and above, the minimum hourly rate increases from £8.21 to £8.72
- For employees aged between 21 and 24, the minimum hourly rate increases from £7.70 to £8.20
- For employees aged between 18 and 20, the minimum hourly rate increases from £6.15 to £6.45
- For employees under 18 years old, the minimum hourly rate increases from £4.35 to £4.55
- For apprentices of all ages, the minimum hourly rate increases from £3.90 to £4.15
Workplace Pensions in 2020/21
Workplace pensions are based on a percentage of the employee’s earnings. This financial year, the amount both the employee and employer contribute to the employee’s auto-enrolment workplace pension remains the same as 2019/20.
Therefore, in 2020/21, the minimum contribution from the employer is 3%, while the employee will contribute up to 5% of their earnings. Together, this results in an 8% total minimum contribution.
Personal Pensions increase in 2020/21
Those with a personal pension can still pay up to £40,000 tax-free in the 2020/21 tax year, while the lifetime allowance for pension savings increases from £1,055,000 to £1,075,000 in line with inflation.
ISA allowance increase in 2020/21
This year, the amount that can be put into an ISA (including Cash ISAs and Stocks & Shares) will remain at up to £20,000. Up to £4,000 can be put into a lifetime ISA in 2020/21, which counts towards the £20,000 threshold.
However, the amount that can put into a Junior ISA is more than doubling from £4,368 in 2019/20 to £9,000 in 2020/21.
Personal Savings Allowance in 2020/21
The PSA gives basic rate taxpayers £1,000 tax-free interest allowance a year on savings, while Higher Rate taxpayers have a £500 tax-free savings interest allowance. This has not changed in 2020/21.
Dividend Allowance in 2020/21
As with the Personal Savings Allowance, the allowance for tax-free dividends remains at £2,000 this year, with dividend tax also staying the same.
Repaying Student Loans update in 2020/21
The earnings threshold for repaying student loans has been updated for the 2020/21 tax year:
- The amount you need to earn annually before paying back a Plan 1 student loan increases from £18,935 to £19,390
- The amount you need to earn annually before paying back a Plan 2 student loan increases from £25,725 to £26,575
Business Tax Changes
Corporation Tax in 2020/21
If you are running a business as a limited company, a club or unincorporated association, or a foreign company with a UK office, you have to pay Corporation Tax on the business’s profits. In 2020/21, Corporation Tax remains at 19%.
VAT threshold in 2020/21
In 2020/21, the VAT threshold remains at £85,000 as announced in the Autumn Budget.
Business Rates update in 2020/21
Business rates are taxes paid on non-domestic properties, including retail stores, restaurants, pubs and offices.
As announced in the 2020 Spring Budget, business rates will be abolished for firms in the retail, leisure and hospitality sectors with a rateable value below £51,000 in 2020/21, under the Retail Discount scheme.
Due to new measures introduced as a response to the COVID-19 outbreak, any business within the hospitality, retail and theatre sectors, along with estate agents, lettings agencies and bingo halls, will pay no business rates for 12 months.
Business rate discounts for pubs will rise from £1,000 to £5,000 in 2020/21.
Company Car and Car Fuel Benefit changes in 2020/21
Employees who are given personal use of a company car are taxed Company Car and Car Fuel Benefit each year. The amount payable is calculated in relation to the value of the car and the amount of fuel that the employee is entitled to use by the company for personal use.
For cars first registered from 6 April 2020, most company car tax rates will be reduced by 2% in 2020/21. This will rise by 1% in 2021/22 and another 1% in 2022/23. Rates will then be frozen until 2024/25.
The rates for pure electric cars are reducing from 16% in 2019/20 to 0% in 2020/21. This will rise by 1% in 2021/22 and another 1% in 2022/23. You can find out more about these updates, and calculate your tax on the HMRC website.
Need help with your personal or business finances this year?
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