Using your annual exempt amount for 202122

The annual exempt amount is one of the most valuable allowances available to UK taxpayers, yet many people don’t make full use of it. Whether you’re employed, self-employed, or investing, understanding how to maximise your exemption in 2021/22 could save you hundreds of pounds in tax. Let’s walk through what you need to know.

What is the annual exempt amount?

The annual exempt amount (AEA) is the threshold below which you don’t pay capital gains tax (CGT) in the UK. For the 2021/22 tax year, this stands at £12,300 for individuals and £6,150 for most trustees. It’s essentially a free allowance that lets you realise gains without triggering a tax bill.

Many people are surprised to learn that this allowance is per person, not per investment or property. If you’re married or in a civil partnership, your spouse has their own separate allowance—so a couple could potentially shelter up to £24,600 in gains between them. This matters hugely when you’re planning disposals.

The key thing to remember is that you must use your allowance in the tax year (6 April 2021 to 5 April 2022), or you lose it. You can’t carry it forward, so any unused relief is wasted.

Identifying gains you can shelter

Start by listing any assets you’re considering selling this tax year: second properties, shares, investment funds, cryptocurrencies, or business assets. Calculate the gain on each (selling price minus cost, minus any allowable expenses).

Once you know your total gains, compare them against your £12,300 allowance. If your gains are below this figure, you won’t pay any CGT—so there’s no urgent need to rush sales. However, if you’re close to or exceeding the threshold, timing becomes important.

Here’s a practical point: if you’re going to make a gain above your allowance anyway, it might make sense to crystallise additional gains in the same year. CGT is charged on a rising scale, with rates of 10% on basic-rate income tax payers and 20% on higher-rate payers. Once you’ve “used” your allowance, further gains are taxed at these flat rates—so bunching gains together can sometimes be more efficient than spreading them across multiple years.

Planning your disposals strategically

If you have losses from previous years or current investments that are underwater, consider whether realising those losses now would offset gains. Losses can be carried forward indefinitely and used against future gains, but you must actually crystallise the loss to use it—simply holding a losing investment doesn’t help.

Married couples should also think about asset ownership. If one spouse has significant gains and the other has none, could you transfer assets before sale to ensure both partners use their allowances? This requires careful planning and proper documentation, so it’s worth discussing with a specialist.

The timing of your sale also matters. A disposal completed before 5 April 2022 counts in the 2021/22 tax year. If you’re close to your limit, wait until 6 April and you’ll have a fresh allowance for 2022/23. Conversely, if you’re making losses, you might want to crystallise them before year-end.

Reporting your gains

Once you’ve disposed of assets, you’ll need to report capital gains on your tax return if your total gains exceed the annual exempt amount. You’ll calculate the gain, subtract your allowance, and pay tax on the remainder.

If you’re not typically a self-assessment taxpayer, remember that you must register with HMRC if you have a reportable gain. Even if you fall within the allowance and owe no tax, you may still need to report the transaction—it depends on your circumstances, so check the HMRC guidance or seek advice.

Self-employed individuals and company directors should also remember that gains and losses from business assets sometimes qualify for entrepreneurs’ relief (now known as capital gains tax relief for entrepreneurs), which offers more generous treatment. The rules here are complex, so professional guidance is advisable.

Final thoughts

Maximising your annual exempt amount requires a bit of forward planning, but the potential savings make it worth the effort. Review your asset position now, identify any disposals you’re planning, and calculate your likely gains. If you’re approaching or exceeding £12,300, consider whether timing, loss offsetting, or asset ownership can improve your tax position.

For tailored advice on your specific circumstances, contact Severn Accounting—we’re here to help.