The 2021/2022 tax year: tips for investors
A guide to the 2021/2022 tax year for investors: focus on the important things and get ahead of the game.
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The 2021/2022 tax year: advice for investors
Taxes are a crucial factor in investing success that investors often overlook. Why is it so important to invest in a tax-savvy way? In a word: compounding. Just as the returns on money invested early can grow exponentially over time due to the effect of compounding, so do tax savings.
Money paid in taxes due to fiscally inefficient investments is money that will never have a chance to multiply. It is a missed opportunity. That’s why investors need to be familiar with the current tax rules and be able to identify tax-free or tax-efficient opportunities to maximise their returns. Read on for the fiscal fundamentals of the 2021/2022 tax year.
When is the next tax year?
As always, the UK tax year runs from 6 April to 5 April of the following year. These dates are important not only as the period for calculating income but also as the deadline for contributing to tax-free accounts, such as an Individual Savings account (ISA). Any part of your yearly ISA allowance that you don’t use by investing it by midnight of the last day of the tax year will be permanently lost.
Other key dates are 31 October, the deadline for filing a paper return, and 31 January of the following year, the last date for filing your tax return online. To sum it all up, the 2021/2022 year starts on 5 April 2021 and ends on 6 April 2022. You then have until 31 October 2022 to file a paper return or 31 January 2023 to file your online return.
Income tax thresholds
The tax allowance for 2021/2022, which means the amount of money someone can earn before they have to start paying income tax, is £12,570, up £70 from the previous year’s allowance. This means you can make slightly more before you have to start paying income tax on what you’ve brought in. Anything over £12,570 and up to £50,270 is subject to the basic rate tax, which is a flat 20%.
During the previous tax year, this ceiling was £50,000. Earnings over £50,270 and up to £ 150,000 are taxed at a higher rate of 40% (this upper limit has not changed from the previous year). Any earnings above £150,000 are taxed at 45%.
These tax thresholds are for England and Northern Ireland and can vary slightly in Scotland and Wales. For more details, visit the HM Revenue and Customs site.
Taxes on capital gains and interest
Another tax investors need to be aware of is capital gains tax, which applies to the profit made by selling most kinds of assets (sale price minus purchase price). The main capital gains tax rates haven’t changed for 2021/2022: 10% for basic-rate taxpayers and 20% for those subject to the higher rate (based on income).
An ISA is exempt from income and capital gains tax, so it should be the very first investment priority for most investors because of its tax advantages. Unless you have debts, in which case it’s best to pay those down first, so the power of compounding isn’t working against you. The ceiling for ISA contributions during the next tax year remains at £20,000.
Finally, investors should remember their personal savings allowance, which exempts them from tax on interest earned up to a certain amount. This amount varies based on your income but it is £1,000 for those in the basic band and £500 for higher-tier earners.
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