Looking ahead

New tax year, new allowances…

With the 2017/18 tax year firmly behind us, it’s time to look forward to planning for the new year. So, what are the main changes?

Personal income tax

The amount you can earn without paying any tax (the personal allowance) has increased to £11,850. Following that, basic rate tax applies on the next £34,500. This means that you won’t pay higher rate tax, until your income exceeds £46,350, an increase of £1,350 from 2017/18.

What’s not such good news is that the dividend allowance has now reduced from £5,000 to £2,000. Any dividends in excess of this, will be charged at 7.5%, 32.5% or 38.1%, depending on whether they fall within your basic, higher or additional rate tax bands.

Don’t forget that spouses and civil partners each have a personal allowance, basic and higher rate bands, as well as the dividend allowance. This allows you to structure your income paying assets between you to be as tax efficient as you can.

Check your tax code is correct

If you’ve recently received a notice of coding, make sure you check that it’s correct. If it’s not, you could end up paying too much or too little tax during the year. Not paying enough tax will mean unexpected liabilities at the end of the year. And if you pay too much, you’ll obviously be at a cashflow disadvantage, having to claim back the overpayment at a later date.

CGT

The annual capital gains tax exemption for individuals has increased to £11,700. Basic rate taxpayers continue to pay 10% tax on capital gains above this figure, whilst higher and additional rate taxpayers, pay at 20%.

The only exception is people selling second properties, including buy-to-let investments. Capital gains on these investments will be charged at 18% for basic rate taxpayers, or 28% for higher and additional rate taxpayers.

Most trusts can enjoy half the annual exempt amount (£5,850) and will pay tax at 20% on chargeable gains (or 28% if it’s a property related gain).

Savings and pensions

ISAs

The ISA allowance remains unchanged at £20,000, and the limit for the Lifetime ISA is also unchanged at £4,000.

Junior ISAs and Child Trust Fund allowances have increased from £4,128 to £4,260.

Pensions

There haven’t been any major changes to pensions either this tax year. The annual allowance for contributions remains at a maximum of £40,000, depending on your earnings, and on whether you have already taken your pension benefits.

The lifetime allowance has however, been increased by £30,000 and now stands at £1,030,000. This is the first increase in the lifetime allowance since 2011!

Student loans

Graduates won’t need to pay back student loans until they’re earning £25,000. This amount has risen in line with changes to average earnings.

Inheritance tax

The inheritance tax threshold (called the nil rate band) stays at £325,000. This is the amount you can leave behind before inheritance tax is due. It can also be transferred between spouses or civil partners if one of you passes away before the other, meaning you can leave up to £650,000 in total tax free.

However, the residence nil rate band has increased by £25,000, from £100,000 to £125,000. This additional allowance lets you pass on the value of your home to your children, subject to certain conditions being fulfilled, including step children, foster children and grandchildren.

If you add this to the nil rate band of £325,000, it means that the total estate which can pass free of inheritance tax rises to £450,000 (or £900,000 for spouses/ civil partners).

If your estate is over the £2,000,000 mark, you may not qualify for the full residence allowance.

Finally, the Office of Tax Simplification (OTS) has just published its consultation document reviewing the existing IHT legislative framework, and the administrative process.

The OTS expects to publish their full report later in the year, with the possibility that the Chancellor could announce changes to inheritance tax in the Autumn 2018 Budget. Now that is an incentive to get your planning underway!

The Financial Conduct Authority does not regulate tax advice. Tax thresholds, percentages and tax rates are in line with our current understanding of HMRC legislation and are subject to change. Taxes are dependent on individual circumstances.