A round-up of the key changes as we head into a new tax year
This week I want to look at some of the areas clients will be asking about as we head into a new tax year.
In the Budget last November, Chancellor Philip Hammond announced the personal allowance would rise by £350 in 2018/19 to £11,850.
At the same time, he increased the basic rate limit to £34,500, although Scotland subsequently chose a lower figure for non-savings, non-dividend income and introduced four new tax rates using its devolved powers.
Outside of Scotland, then, the higher rate threshold for 2018/19 will be £46,350 (and £43,430 in Scotland, together with a 41 per cent higher rate).
The Conservative Party’s manifesto 2020/21 goal of a £50,000 higher rate threshold (outside Scotland) remains broadly on track but will now require an above-inflation increase.
The zero starting rate band for savings income will stay at £5,000. The £50,000 threshold for the high income child benefit tax charge, the £100,000 threshold for phasing out the personal allowance and the £150,000 starting point for additional rate tax are all once again frozen for the coming year.
The result is that the overall tax burden is little changed for basic rate taxpayers, but most higher rate taxpayers will see a useful boost. This starts to fade once the personal allowance is lost, as table one demonstrates.
The married couple’s allowance (which is only available if a partner was born before 6 April 1935) will rise to £8,695 (minimum £3,360) because it is linked to the consumer price index. The married couple’s transferable tax allowance rises to £1,190.
The personal savings allowance levels are unaltered for 2018/19, at £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and nil for additional rate taxpayers.
However, the dividend allowance, only introduced in 2016/17, will fall from £5,000 to £2,000. Those who have a large portfolio and/or draw dividends from a private company could face higher tax bills (table two).
One technical income tax change which has not received much attention is that, from 6 April, all payments in lieu of notice will be chargeable to income tax. At present, only contractual payments attract tax, although what constitutes “contractual” has proved hard to define.
The 2018/19 National Insurance contribution thresholds will rise marginally, thanks to the 3 per cent September 2017 inflation number. The starting points for employer’s and employee’s NICs rise by £5 a week to £162 a week, while the upper earnings/profits limit will rise to £46,350 (£892 a week) in line with the UK (not Scotland) higher rate threshold.
The result is an effective clawing back of about £104 of the income tax savings for most higher rate taxpaying employees. There is no change in the main employer and employee NIC rates for 2018/19 but both could face higher contributions to auto-enrolled pensions.
Class 2 contributions will be £2.95 a week in 2018/19 and should then disappear from 2019/20 – a year later than previously planned. The Class 3 voluntary rate will rise by £0.40 to £14.65 a week.
The plan to levy employer’s NICs on any part of a redundancy payment above the £30,000 tax exempt amount for redundancy payments has been deferred one year to 6 April 2019.
NI is a tax in all but name; a fact all governments have used to their advantage. Its dual identity can also be used to the taxpayer’s benefit by taking advantage of salary sacrifice as a way of paying pension contributions. While a clampdown on most salary sacrifice arrangements came into operation last April, those involving pensions were specifically excluded.
Capital gains tax
The capital gains tax annual exempt amount for 2018/19 will rise by £400 to £11,700.
The inheritance tax nil rate band, which has been frozen at £325,000 since April 2009, will remain unchanged until at least April 2021. The residence nil rate band, which was introduced in 2017/18, will rise by £25,000 to £125,000 for 2018/19.
According to Nationwide the average UK property price has risen by 37 per cent since the second quarter of 2009. While the residence nil rate band has helped to counteract this, the fact is that, in 2016/17, IHT raised more than twice the tax revenue it did in 2009/10.
For 2018/19, the overall Isa investment limit will remain at £20,000, with the Junior Isa and Child Trust Fund limits increasing to £4,260. Lifetime Isa and Help to Buy Isa limits remain unchanged.
From 6 April, revised regulations will take effect for the inheritance of Isas by spouses or partners. The new rules are more generous than their predecessors and add to the appeal of Isas as a source of retirement income for couples.
I hope that this reminder of the key changes has been helpful and will act as a catalyst to ensure that clients’ tax planning and finances are optimised to secure the best possible outcome. As we all know, tax planning at the beginning of the tax year is usually much more effective than leaving it until the last minute.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn