A new tax year. Time for some tax planning?
The new tax year begins today, so the new tax allowances and benefits come into force. This year, most but not all of the changes are good news but here’s a quick guide to what the new tax year has in store for you.
Firstly, the tax-free personal income allowance is increasing from £11,500 to £11,850. Above the tax-free allowance, you will have to pay basic rate tax up to the new higher rate tax threshold of £46,350 – up from £45,001. Above this, the higher rate tax payable remains at 40%, and additional rate tax stays at 45% on income above £150,000.
For the new tax year, you once again have a tax-free individual savings account (Isa) allowance of £20,000. This means you can shelter tax-free up to £20,000 in cash, stocks and shares, or innovative savings accounts such as peer-to-peer lending products. A couple can contribute £40,000 into Isas.
No tax is payable on cash Isa savings and investments in stocks and shares Isas avoid capital gains and dividend taxes. It makes sense to make full use of your allowance early in the tax year if you can, as time in the market is still preferable to market timing. An alternative approach is to make regular monthly contributions.
The personal savings allowance, which gives you tax-free savings interest, remains at £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and zero for additional rate taxpayers.
So far, so good. However, with effect from today, the tax-free dividend allowance falls from £5,000 to £2,000, although dividends received by pension funds and Isas remain tax-free. Switching funds into your Isa wrapper therefore makes sense where applicable.
On the Venture Capital Trust (VCT) front, there is no change to the rules. This means you can still invest £200,000 per annum and get up to 30% income tax relief and regular tax-free dividends.
The rules for Enterprise Investment schemes (EIS) also remain the same, so you can invest up to £1 million and get 30% income tax relief but no tax-free dividends. You can also defer chargeable capital gains, as long as you remain invested in the EIS. There are also no rule changes to Seed Enterprise Investment Schemes (SEIS), so you can still invest up to £100,000 and get 50% tax relief. Once again, there are no tax-free dividends.
With regards pensions, the annual pension allowance remains the same at £40,000, whilst for those earning over £150,000, their contribution levels will reduce as in previous years. For those who have withdrawn monies from their pension pot and have entered drawdown, a lower limit of £4,000 applies. However, the lifetime allowance for pensions savings has increased by 3%, from £1million to £1.03 million.
The inheritance tax allowance remains the same at £325,000, as does the annual gift allowance of £3,000. However, the residence nil-rate band increases from £100,000 to £125,000.
Finally, in this brief summary, the capital gains tax allowance has increased from £11,300 to £11,700, whilst married couples and civil partners can still combine their annual allowance.
The start of a new tax year is a good time to think how you can better manage your personal finances and make the best use of your various tax allowances. From inheritance tax planning and retirement planning to claiming marriage tax breaks, investors can potentially save thousands of pounds.
This article should be treated as a general guide only and is not intended either to be a comprehensive statement of the law or specific tax planning advice. No liability is accepted for the opinions it contains, or for any errors or omissions. To discuss your tax planning options and for tax planning advice, contact Kellands.