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5 Things To Know About Your Finances Heading Into 2021

Although the hangover from 2020 is one we’ll feel for some time yet, a new year is upon us at last! And, with a new year come all sorts of updates that it’s important you’re up to speed on to make the most of your money in the year ahead. We’ve rounded up the ones that we think are the most important to know about – read on to make sure you’re clued in!

Personal Allowance

How much tax you pay each year depends on what you earn, and how much of what you earn is above your Personal Allowance. Your Personal Allowance is the amount of money you can earn before you start to pay Income Tax. For the 2020-21 tax year, this amount is £12,500, and you will only pay tax on any amount you earn over and above this. But, in November 2020, the government confirmed that they will increase the Personal Allowance for the 2021-22 tax year, which starts on 6th April. The increase is 0.5%, which is in line with inflation. If our maths is right, this means that your personal, tax-free income allowance will increase from £12,500 a year to £12,570 in April.

But I earn more than £12,570, what does this mean for me?

When the government increase the Personal Allowance, this means that in most cases, you will pay tax on a little bit less of your salary. If you have a high salary that means you pay some Income Tax at the “higher” rate of 40%, then you will also find that a slightly larger portion of the tax you pay is at the lower, “basic” rate of 20%.

The bottom line is that when Personal Allowances increase, a bit more of the money you earn should end up in your pockets, rather than HMRC’s!

How will I know my Personal Allowance has updated?

That’s easy! You’ll be able to tell what your Personal Allowance is by checking the tax code on the first payslip you receive after April 6th 2021. It should read 1257L. If you see a different tax code and you don’t know why this is, then we recommend checking this with your employer, or giving HMRC a call to find out.

National Living Wage and Minimum Wage

At the same time that the government announced the increase to the Personal Allowance, they also announced increases and changes to the National Minimum Wage and National Living Wage.

From 6th April 2021, the National Living Wage will be £8.91 per hour. This represents £345 extra per year for someone working full-time hours. In addition to the increase, workers aged 23 and 24 will be eligible for the National Living Wage in April, for the first time. In previous years, you needed to be at least 25 years old to qualify, so this will be a big, positive change for many!

I’m younger than 23, what will my wages be?

If you’re younger than 23 years old when the increase comes into effect on April 6th 2021 and are working in a job that pays the National Living Wage or National Minimum Wage, then what you earn depends on how old you are. If you are 21 or 22 years old, then your pay will increase to £8.36 an hour, up from £8.20. If you are aged between 18 and 20, your pay will go up from £6.45 to £6.56 an hour. Workers under the age of 18 will see their hourly rate increase from £4.55 to £4.62, and apprentices will get an extra 15p per hour, with their rate rising to £4.30, up from £4.15.

If your birthday during the next tax year pushes you between the National Minimum Wage brackets, or from National Minimum Wage to National Living Wage, then your employer should be on top of this and your pay should increase automatically from your first payday after your birthday. But, it can’t hurt to give them a gentle reminder that you’ll be getting older, just in case!

I earn more than Minimum Wage – will I get a pay rise, too?

If you’re fortunate enough to earn more than the National Living Wage or Minimum Wage, then whether you get a pay rise in 2021 really depends on your employer. Many employers have their own policies about reviewing salaries on an annual basis to make sure that you’re paid competitively and fairly for what you do, and that your income increases in line with inflation. But, 2020 has been a difficult year for lots of businesses, so even if you usually get a raise every year, it’s not guaranteed in 2021. Your employer should communicate with you about what their plans are.

If you work in the public sector, then your prospects for earning more in 2021 are even less bright. The government have confirmed that unfortunately, with the coronavirus pandemic raging on, most people who work in the public sector will not receive a pay rise in 2021. The exceptions to this are NHS doctors, nurses and other staff, and those who work in other parts of the public sector whose salaries are currently below £24,000.

Coronavirus income support schemes

While we’re on the topic of wages and incomes, the government have also announced that their Coronavirus Job Retention Scheme (CJRS) for employed people will be extended until the end of April 2021. This will come as a huge relief to many furloughed employees who haven’t been able to work at all since the pandemic took hold, or who are only able to work when the rules in their local area allow for it.

Under the CJRS, employees can earn up to 80% of their salary, or £2,500, whichever is the lesser, for hours they haven’t worked that they would have done under normal circumstances – if you can remember what those are! This might be all your hours if you can’t work at all, or only some of them if you’ve been able to work a bit of the time, but less hours than you would normally. If you can work some of the time around local restrictions, then you’ll be paid in full for those hours as normal.

Will the scheme be extended again after April?

At the moment, we don’t know. The government haven’t announced their intentions yet and we reckon that they, like us, need to wait and see what happens before they make the call! However, we do know that they’re committed to supporting those of us whose jobs and livelihoods have been affected by the coronavirus pandemic. So, if we’re still facing restrictions that mean some sectors aren’t able to open or can only operate in a restricted way, then it’s a pretty reasonable bet that support measures, in some shape or form, will continue.

Payment holidays

Payment holidays have been a lifesaver for many people who found themselves suddenly in a rather different financial situation in 2020. And, this support for people whose finances continue to be impacted by the pandemic is set to continue into 2021.

Under rules set out by the Financial Conduct Authority (FCA), who regulate the finance industry in the UK, you can request a payment holiday of up to six months in total, but this includes any payment holidays you’ve already had since the beginning of the pandemic.

The rules for payment holidays are largely the same, whether you’ve got a credit card, a personal loan, a mortgage, or are paying for something on finance:

  • Lenders can agree a payment holiday with you of up to three months at a time
  • Lenders can only agree to give you a payment holiday for 6 months in total, even if there’s been a gap in between the payment holidays
  • If you need to renew or extend your payment holiday, then this will need to be arranged with your lender and is subject to you not having exceeded the 6-month limit, or being behind on payments for reasons unrelated to coronavirus
  • If you need a payment holiday, you must apply for it with your lender by 31st March 2021
  • All payment holidays will end by 31st July 2021, even if you haven’t yet reached the 6-month limit

The only exception to these rules is high-cost, short-term loans and payday loans. Because these loans are typically for much shorter amounts of time – a few months, usually – the payment holiday available is for a maximum of one month. If you’ve already had a payment holiday on a short-term loan since the scheme was introduced, you can’t ask for another.

I’ve already had 6 months’ worth of payment holidays but I still need help – what should I do?

If you’ve already reached the 6-month limit on payment holidays and are still struggling financially, whether because of coronavirus or another reason, then lenders also have tailored help available for people in your situation. However, while payment holidays arranged because of coronavirus won’t affect your credit score, the other help available if you’re struggling financially could have a negative impact.

I can afford to pay a bit towards my balances – should I get a payment holiday while I can?

Taking a payment holiday means interest will continue to be added to your balance – unless your lender has told you otherwise – and so could mean you have more to pay back when your payments re-start. So, if you can afford to pay a bit towards your balances, then we recommend you do, as this means paying less interest in the long-term.

The payment holidays that the FCA has organised with lenders have been built with the flexibility for you to pay what you can afford, even if that’s not the entire amount you’re due to pay. These are called “partial payment holidays” and allow you to make reduced payments for a set amount of time.

Savings allowances

While the coronavirus pandemic has caused financial struggles for many, it has also, on the flip side, enabled a lot of people to save more than usual, and perhaps put money away into savings for the first time. So, while you might not have worried about what your savings allowances were in the past, if you’ve been able to save more, or start saving in 2020, then it’s well worth knowing what they are as we head into 2021!

Like the Personal Allowance, savings allowances run for the duration of the tax year rather than the calendar year, meaning they reset on 6th April. That means you still have a bit of time to use up your allowances from 2020, so make the most of them!

ISA Allowance

Your ISA Allowance is the amount of money that you can save in an Individual Savings Account (ISA) without paying tax on the interest you earn. For the 2020/21 tax year, the allowance has been £20,000, and will probably stay the same for the 2021/22 tax year, too.

There are several types of ISA you can put your savings into to make the most of your annual allowance. The most popular types of ISA are Cash ISAs, Stocks & Shares ISAs and Lifetime ISAs (LISAs).

But there are some restrictions about how ISAs can be used, especially as time goes on and you think about opening new ISA accounts and moving your money between them to earn as much interest as possible. So, it’s worth taking some time to research the different types of ISAs and the rules around how they can be used, so you’re clued up before you start saving with them.

Personal Savings Allowance

The Personal Savings Allowance (or PSA) refers to the amount of interest you can earn on your savings without paying tax on it. This is separate to your ISA allowance, and covers you for interest earned on accounts like regular savers, easy-access savings accounts, and long-term savings accounts like fixed-term bonds.

What your Personal Savings Allowance is, is linked to your Income Tax. If you pay Income Tax at the “basic” rate of 20%, then for the 2020/21 tax year, your Personal Savings Allowance is £1,000, and it looks set to stay the same in the next tax year, too. If you earn more, and also pay “higher” rate Income Tax at 40%, then your Personal Savings Allowance is less: £500.

Remember, this allowance is for the interest you can earn on your savings before you pay tax on it. You don’t pay tax on the money you originally saved. With interest rates as generally low as they are right now, this means you can save a lot of money before you have to worry about being taxed on it!

 

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