Happy New (tax) Year! While there may not have been any firework displays or renditions of Auld Lang Syne, on the 6th of April we entered the new 2018/19 tax year. This is the time that the majority of changes to the UK tax system are likely to come into play. It’s also a fresh start for many of your tax allowances and limits – which means it’s a time of financial planning opportunity for maximising your tax efficiency.
What’s different in 2018/19?
One of the more popular savings allowances, your ISA Allowance is staying the same at £20,000. However the Junior ISA Allowance is increasing in line with the Consumer Price Index (CPI), which is used to measure inflation.
The Lifetime Allowance (LTA) has also increased in line with CPI, which is a small piece of good news for those with large pension pots. The LTA is the amount that you can have in pension benefits without incurring additional tax charges, so the increase provides welcome extra headroom for your pension savings.
Your Capital Gains Tax (CGT) exemption is also going up slightly. This allowance refers to the maximum profit you can make on selling assets without paying capital gains tax.
The Inheritance Tax (IHT) threshold remains at £325,000 in 2018/19, however the Residence nil rate band enhancement has increased from £100,000 to £125,000. This is an extra IHT allowance that was first introduced last year to make it easier for people to pass the family home on to children or grandchildren. You can find out more about how this could help you reduce your inheritance tax bill by reading our article on the new IHT boost for families.
Here are the main changes at a glance:
Dividend Allowance – the drop
Looking at the tax changes that have come in in 2018/19, dividend tax is the area that bucks the trend for rising allowances. In the previous tax year, you didn’t pay any tax on the first £5,000 of dividend income you received from your investments. However, this allowance dropped to £2,000 on 6 April 2018.
The lower allowance is most likely to affect small business owners who pay themselves in dividends, so if that’s you then it’s a good idea to get in touch with your financial and business advisers to discuss your strategy. But business owner or not, it’s important to try and manage your taxable dividend income from investments so that it falls within the allowance. Holding your investments in tax wrappers, such as an ISA or pension, can help with this.
Income tax bands and the new Scottish system
Another area that normally changes slightly at the start of a new tax year is income tax. This year however, the change is much greater if you’re a Scottish taxpayer, as we now have an increasingly divergent tax system in Scotland from the rest of the UK.
For the first time, taxpayers in Scotland will have five Income Tax bands and rates. But these new rates and bands only apply to their salary, pension or rental income. Income from savings and investments will continue to be taxed under the same three band system applying to England, Wales and Northern Ireland.
Here’s an overview of the situation across the country now that we’re in the 2018/19 tax year:
|Rate||Scotland||Rest of the UK|
|19% (starter rate)||£11,851 – £13,850||n/a|
|20% (basic rate)||£13,851 – £24,000||£11,851 – £46,350|
|21% (intermediate rate)||£24,001 – £43,430||n/a|
|40% (higher rate UK)||n/a||£46,351 – £150,000|
|41% (higher rate Scotland)||£43,431 – £150,000||n/a|
|45% (additional rate UK)||n/a||Over £150,000|
|46% (top rate Scotland)||Over £150,000||n/a|
Pension tax relief is intrinsically linked to income tax, so changes to the Scottish system come into play here too. Pension tax relief is applied at the same percentage as the highest rate of income tax you pay.
However, if you pay the Scottish starter rate of Income Tax at 19%, you will still benefit from pension tax relief at 20% and you won’t be asked to pay back the difference. If you pay the Scottish intermediate rate of Income Tax (21%), higher rate (41%) or top rate (46%) then you will be able to claim back your additional tax relief by contacting HMRC or completing a Self-Assessment tax return – the same that higher or additional rate taxpayers would in the rest of the UK.
New year, new start for your allowances
Every April the counter restarts on some of your most important tax allowances, meaning you have renewed opportunities to save or invest your money while benefitting from tax relief.
- Pensions Annual Allowance
This is the maximum amount you can save into your pension each year without incurring a tax charge. So if you reached your limit last year, from today you can pay more money into your pension without worrying about paying extra tax (as long as you stick to this year’s limit!). The Annual Allowance limit is £40,000 for most people, however if your total income is more than £110,000 you could see it reduced to as low as £10,000.
If your Annual Allowance is reduced under these rules, it might be possible to use up unused allowances from the previous three tax years to pay a large personal contribution which keeps your ‘income’ below the £110,000 threshold and enable you to reinstate your full £40,000 allowance this year.
This is pretty much as close to a win-win situation as it gets as any extra contributions will still benefit from tax relief. Your financial planner will be happy to discuss if this is a suitable option for you.
- ISA Allowance
Your ISA Allowance resets every tax year meaning you can now contribute up to another £20,000 if you want to.
With the fall in the Dividend Allowance, a Stocks & Shares ISA could be a good tax-efficient home for mutual fund investments. Your financial planner can look at how these allowances can work together to protect you from paying more tax than you need to. So speak to them if you’re thinking about transferring.
Take advantage of your new reliefs and allowances
Much like any other “fresh start”, the new tax year can be a great time to delve into the detail of your financial situation. Speak to your financial planner to take advantage of the opportunities that are now open to you in the new tax year.
If you don’t currently have an adviser, we’d be delighted to help you look after your finances. Get in touch for a no-obligation consultation with one of our financial planners to see what we can do for you.
This article was just a brief overview of the main tax changes to welcome you into the 2018/19 tax year. But when it comes to tax, how you’re treated will depend on your individual circumstances. Your 1825 Financial Planner is up to date on the latest rules and can advise you on how to make your financial plan as tax efficient as possible for your personal situation, so please do get in touch if you have any questions.
Laws and tax rules may change in the future and the information here is based on our understanding in April 2018. Investments can go down as well as up meaning you may get back less than you put in. The information in this blog or any response to comments should not be regarded as financial advice.