New Tax Year allowances

The lighter nights are here and now with it, a new tax year and so I thought it would be useful to send out a quick round-up of the main changes to allowances that came into effect this week:

Personal Allowance – increases to £12,500; this is an increase of £650 of tax-free income

Basic Rate tax band – increases to £37,500; together with the increased Personal Allowance means total gross income of £50,000 before High Rate Income tax is paid. Higher and Additional rate tax bands, and those applicable to Trusts stay the same.

This means that basic-rate taxpayers will save £130 a year, while higher-rate taxpayers will save up to £860.

The next stage of the phased removal of mortgage interest relief for buy-to-let investors has also taken effect; landlords used to be able to claim interest paid on their mortgages as an expense to reduce their tax bill, this tax year they will be able to claim just one quarter of the interest as tax deductible, next year the relief will be completely removed.

Dividend Allowance – stays at its reduced rate of £2,000; this is an allowance and not an exemption, therefore uses part of the Basic Rate tax band. Dividends above £2,000 are taxed at 7.5% if they fall into the remaining basic rate tax band, 32.5% for higher rate tax payers and 38.1% for additional and trust rate tax payers.

There is no change to the Annual Allowance for pension savings which remains at £40,000 unless you are subject to the Money Purchase Annual Allowance of £4,000. The Lifetime Allowance however increases to £1.055 million as a result of the CPI increase.

Capital Gains exemption – this tax year increases to £12,000, and half of this amount for Trusts (£6,000); gains above the annual exemption are taxed at 10% for basic and starting rate payers and 20% for higher, additional rate tax payers and trusts (gains on residential property continue to be subject to the 8% surcharge).

The Inheritance Tax Additional Residence Nil Rate Band which was introduced in 2017 increases by a further £25,000 to £150,000, with just one further increase planned for next year to increase the total Nil Rate Bands to £500,000 per individual. However, the Residence Nil Rate Band is only applicable where a main residence is transferred to direct descendants and the estate is less than £2 million.

There is no change to the ISA allowance this year which remains at £20,000; the maximum amount that can be saved into Junior ISAs increases slightly to £4,368. If you are making monthly savings into a JISA then to maximise the savings, you should increase the monthly amount to £364.

The New State Pension amount for those who have made sufficient qualifying year’s National Insurance Contributions increases by £4.25 per week to £168.60 per week; remember that you need to contact DWP to claim your State Pension, although you should get a letter from them around 2 months before it is due telling you what to do. State Pensions are no longer paid automatically!

We will of course take the revised allowances into account when considering your Financial Planning, but as usual, do not hesitate to contact us if you have any queries.