THE SAYING GOES THAT “NOTHING IN LIFE IS CERTAIN aside from death and taxes”. Yet while there’s no doubt we’ll all be taxed in one form or another, the rates can change rapidly. As we are now in a new tax year, I thought it an opportune time to provide a reminder of the new rates and allowances and some changes that have just been introduced to legislation.
Income Tax allowances
Each of us has a “personal allowance”, which denotes the amount we can earn without paying any Income Tax. If you earn more than your personal allowance, then you pay tax at the applicable rate on all earnings above the personal allowance, but the allowance remains untaxed. This personal allowance is now £11,500 and the income limit for personal allowance remains unchanged at £100,000. The personal allowance is reduced by £1 for every £2 of “adjusted net income” above £100,000, so it will be wiped out altogether at £121,000 or above of taxable income.
Income Tax rates
These are the individual bands for taxable income in excess of the
personal allowance above: £1-£33,500 20%* £33,501-£150,000 40%
Over £150,000 45% * There is also a starting rate of tax of 0% which
applies to savings income only. However, if an individual’s taxable,
non-savings income exceeds £5,000, then the 0% starting rate for savings won’t apply. Dividend income is taxed at 7.5% (income up to the basic rate), 32.5% (higher rate) and 38.1% (additional rate).
Every individual has a dividend allowance of £5,000 for the tax year
2017/18 (this is reducing to £2,000 in April 2018). Dividends within the allowance are paid tax-free. It is also worth noting that if you
are married or in a civil partnership and both partners were born on or after 6th April 1935 then you may be entitled to the “Marriage tax allowance”. This effectively allows couples to transfer a proportion of their personal allowance between them.
Alternatively, if at least one partner was born before 6th April 1935, then you can get a different married couples’ allowance which, despite its name, is also available to civil partners. Further information on this can be found on HMRC’s website.
Capital Gains Tax
Capital Gains is the least common tax on income, and for many it won’t apply. However, if you sell or give away an asset worth more than £6,000, you could have to pay CGT. That being said, it doesn’t apply for main homes, cars or lottery/pools winnings, among other things. Each year, individuals have an annual exemption amount that allows them to receive some gains tax-free. Above this, you pay Capital Gains Tax on all gains. The new exemption is £11,300.
Inheritance Tax rates
The rate was frozen at £325,000, but the Residence Nil Rate Band
(RNRB) has begun to be introduced at £100,000. To recap, this is in addition to an individual’s existing nil rate band and is conditional on the main residence being passed down to direct descendants (e.g. children, grandchildren). This allowance will be phased in over four years in increments of £25,000. It will be £100,000 at outset, gradually increasing to £175,000 in 2020/2021. These are the maximum amounts, so the available allowance will be reduced
if the value of the property is less than this. The family home doesn’t need to be owned at death to qualify in order to help those who may have downsized or sold their property to move into
residential care. Anyone with large estates of over £2 million will see the RNRB reduced by £1 for every £2 that the deceased’s estate exceeds £2 million.
ISA limits
Allowances were increased to £20,000 and the Junior ISA limit is now £4,128. The new Lifetime ISA (LISA) limit is £4,000, which forms part of the main ISA allowance. Further information on the new LISA tax wrapper is as follows:
- The LISA is aimed at helping younger people save both for a first home and/or their retirement, without having to choose one over the other at outset.
- The LISA is available to anyone aged under 40 for investments of up to £4,000 in each tax year, which forms part of the normal ISA subscription of £20,000.
- The government will add a 25% bonus on the contributions paid and contributions with the government bonus can be made from age 18 to age 50. So if you invest the full £4,000 in a tax year, there will be a £1,000 government top-up (just like a pension). You will notice that, although you can only start saving in a LISA before the age of 40, once you have started you can continue to receive tax benefits until age 50.
- LISA funds can be used to buy a first home up to £450,000 at any time from 12 months after opening the account. Any withdrawal going towards the purchase of a first property will be paid direct to the conveyancer – this cannot be paid to the LISA holder or the bonus is lost.
- Any withdrawals not related to a first property purchase can be made at any time, but if the saver is below age 60, the government bonus (together with any growth on the bonus) will be lost and a 5% charge will be payable. From age 60, the saver is free to make full or partial withdrawals at any time tax-free and with no charge.
- Savers will be able to contribute to one LISA in each tax year, as well as a cash ISA, and a stocks and shares ISA, within the new overall ISA limit of £20,000.
Pension allowances
In principle, neither the annual nor lifetime allowances have changed from the previous tax year. These remain at £40,000 per annum as the annual allowance and £1,000,000 in pension funds as the lifetime allowance. It is also worth noting that if you have an annual income of over £150,000, your annual allowance will start to be reduced. The maximum reduction is £30,000 down to a £10,000 annual allowance. Also, if you use some forms of
the new pension freedom rules to access your pension pot, then
you will incur the Money Purchase Annual Allowance, which caps
pension contributions at £4,000 per annum.
