We’re a few weeks into the tax year already, and if you’re going to make the most of the allowances and tax breaks on offer, it’s important to understand what’s changed. Getting to grips with the changes early on can help set you on the right path for the rest of the year on beyond.
Among the areas to be aware of this year are:
There are a few reasons why you may notice a change in your pay cheque this month. One of these reasons could be due to the changes in Income Tax.
Firstly, the amount you can earn before you start paying Income Tax, the Personal Allowance, has increased in England and Wales. It’s now £12,500 following a £150 rise for the new tax year. The threshold for paying the Higher Rate of Income Tax, which is 40%, has also increased; from £46,350 to £50,000. For many employees, it will mean more money in their pockets. Both these changes were announced in the Autumn Budget 2018 by Chancellor Phillip Hammond.
Following the Scottish Budget in December last year, tax thresholds in Scotland have also changed. The Personal Allowance remains in line with England and Wales, while the threshold for both the Basic and Intermediate Rates thresholds have increased to £14,550 and £24,945 respectively. The Higher Rate threshold has fallen from £44,274 to £43,431.
If you have a student loan, the earnings threshold before you start repaying has increased too.
If you started your studies before 1st September 2012 you are on plan one and will now pay back 9% of your income that exceeds the new £18,395 threshold. If you started your studies after 1st September 2012, you’ll be on plan two, which now has a threshold of £25,725.
If you’re an employee, your student loan repayments will be adjusted automatically. If you’re a director being paid a salary and dividends, it’s important to remember that repayment is based on your total income.
Most employees in the UK now have a Workplace Pension. If you’ve been paying the minimum contributions since being enrolled, you’ll notice the amount leaving your pay cheque for 2019/20 is higher.
During 2018/19, you’ll have paid 3% from your pensionable earnings into your retirement fund, including Tax Relief. This has now increased to 5%. The good news is that employer minimum contributions have also increased to 3%, effectively adding ‘free money’ to your pension as long as you continue to contribute.
While we’re on the subject of pensions, the Lifetime Allowance has increased too. The value of all your pensions can now be £1.055 million, up from £1.03 million, before you incur additional tax charges. Though it’s important to note the Lifetime Allowance is still below the high of £1.8 million.
For Defined Contribution pensions, the value of your pension includes personal contributions, employer contributions, tax relief and investment returns. For Defined Benefit pensions, the value is calculated by multiplying your expected annual income by 20.
Unfortunately, the subscription limit for adult ISAs (Individual Saving Accounts) hasn’t changed from last year’s £20,000. However, if you’re saving for a child, the Junior ISA (JISA) limit has increased. For this tax year, you can place £4,368 into either a Cash or Stocks and Shares JISA for a child’s future.
Capital Gains Tax
Capital Gains Tax (CGT) is the tax you pay on the profit you make when you dispose of an asset, whether you sell it or give it away. It’s payable on most personal possessions worth £6,000 or more, property that’s not your main home, shares that aren’t held in an ISA or PEP (Personal Equity Plan) and business assets.
However, there is an annual tax-free allowance. For the new tax-year this will be £12,000 for individuals or £6,000 for trusts. Profit made above these thresholds will be taxed at a rate depending on whether you’re a basic, higher or additional rate taxpayer.
The Entrepreneur’s Relief tax rate remains the same for 2019/20 but there’s a crucial change that could change your plans. The relief reduces the amount of CGT payable when you sell shares in all or part of your business, taking the tax rate to 10%. Previously, one of the qualifying conditions for Entrepreneur’s Relief was that the company must have traded in the 12 months leading up to the date when you dispose of the shares. This has now been extended to 24 months.
The amount you can pass on to loved ones without Inheritance Tax (IHT) being due on your estate has increased too, so long as certain conditions have been met.
The Nil-Rate Band remains at £325,000; any estate can be valued at below this amount and left to anyone without IHT being due. The Residence Nil-Rate Band can boost this if you’re leaving your main home to children or grandchildren. The Residence Nil-Rate Band now stands at £150,000, following a £25,000 rise. This potentially allows you to pass on £475,000 free from IHT as an individual or £950,000 if your spouse or civil partner’s unused allowances pass to you.
The Residence Nil-Rate Band will increase by a further £25,000 for the 2020/21 tax year.
If you’d like help understanding how the changes of the 2019/20 tax year will affect you and your financial plan, please get in touch.
Please note: The Financial Conduct Authority does not regulate tax advice.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investors.