Tax planning should be a constant, all year round. However, if it has fallen by the wayside a bit recently, the start of a new tax year is the perfect time to kick-start your 2019 planning, and making the most of the allowances and exemptions available. The 2019/20 tax year has brought several changes – here’s a summary of what’s changed, what’s not changed, and some actions you should consider.
On the move…
1. Income Tax
There is good news for both basic- and high-rate tax payers, with the personal allowance and higher rate threshold both rising. The personal allowance – i.e. the amount that you are allowed to earn before you start paying Income Tax – has risen from £11,850 to £12,500. This will save an average earner £130 a year.
Higher earners will save £860 thanks to the higher-rate threshold rising from £46,350 to £50,000, meaning you can earn more before the 40% tax rate kicks in. The additional rate tax band of £150,000 remains unchanged.
||Up to £12,500
||£12,501 to £50,000
||£50,001 to £150,000
There are a different set of changes for Scottish taxpayers. These can be found on HMRC’s website.
2. Pension contributions
The amount that you and your employer pay into your workplace pension through auto-enrolment has risen – helping everyday pension savers plan for their retirements more effectively. The amount employers must automatically pay into a staff member’s pension will rise to 3%, with an additional 5% from the individual.
3. Capital Gains Tax
The Capital Gains Tax annual exempt amount for individuals has increased from £11,700 to £12,000. We recommend taking advance of your CGT allowance, as it’s a great way to transfer assets into ISAs or pensions to provide a shelter from any future liability.
4. Junior ISAs
There’s also good news for the younger generation: the Junior ISA allowance has gone up to £4,368. Alongside pensions, JISAs present a great opportunity to help give children/grandchildren a financial head-start.
5. Residence nil-rate band
The new tax year sees the inherited property allowance – known as the ‘residence nil-rate band’ – rise from £125,000 to £150,000. This means you can pass on an extra £25,000 tax-free to your descendants. And, combined with the standard Inheritance Tax allowance of £325,000, the increase means you can now pass on as much as £475,000 to direct descendants tax-free. For married couples and civil partners that figure is £950,000. This will rise to £1m next April.
The rules are complicated, so getting advice is vital.
||Residence nil-rate band
||Increases in-line with Consumer Prices Index
6. Entrepreneurs’ Relief
There has been a minor tweak to Entrepreneurs’ Relief. Entrepreneurs can continue to benefit from tax relief at 10% on up to £10 million of lifetime gains. However, as of 6 April, the minimum period throughout which the qualifying conditions for the relief must be met is 24 months rather than 12 months.
7. National Insurance (NI)
National insurance threshold increases will hit the pockets of higher earners, but will be good news for low earners. The threshold for starting to pay NI has increased from £8,424 to £8,632. Between £8,632 and £50,000, you pay National Insurance at 12%; above £50,000, you pay 2%. This upper threshold is substantially higher than last year – and people earning more than this amount might see their bill rise, as more of their income is taxed at 12% rather than 2%.
Staying the same
1. Personal pensions
Despite the contribution percentages changing, there have been no major changes to pension allowances this tax year. Most people can still get tax relief on pension contributions worth up to £40,000 per tax year (or 100% of earnings, if less). Those with adjusted earnings of more than £150,000 will continue be subject to tighter restrictions.
Documents published last month confirmed that a review of pension tax relief is still very much in the government’s sights – so it’s sensible to make full use of the current reliefs!
The Lifetime Allowance – the most you can take from your pension savings before triggering an extra tax charge – increased from £1,030,000 to £1,055,000 on 6 Apr in line with consumer price index inflation.
2. Dividend Allowance
For 2019/20, the Dividend Allowance remains at £2,000, meaning you won’t pay tax on income generated from a share portfolio of around £57,000 held outside of an ISA or pension wrapper, based on a yield of 3.5%. The increased Income Tax thresholds outlined above mean that you can take more in dividends before paying the higher dividend tax rate.
||Tax rate on dividends above the allowance
Although there are changes to Junior versions, the most you can put into your ISA remains at £20,000 for the 2019/20 tax year. This includes Stocks & Shares and Cash ISAs. This week’s news of a possible six-month delay to Brexit could be bad news for Cash ISA savers though, as it has pushed back expectations of further interest rate rises until the second half of 2020.
With the allowances being refreshed for the new tax year, now is the time to take full advantage of your £20,000 allowance, in order to benefit from compound interest.
4. Inheritance Tax
Everyone in the 2019/20 tax year has an Inheritance Tax allowance of £325,000 – known as the ‘nil-rate band’. The allowance has remained the same since 2010/11.
5. Personal Savings Allowance
For 2019/20, basic rate tax payers can continue to earn £1,000 interest on savings before paying tax. Those paying tax at the higher rate see their allowance remain at £500. If you’re an additional taxpayer earning £150,001 or more, you’ll lose entitlement to the allowance.
Hitting the ground running
As you can see, there are many planning points that are worth considering at the start of the tax year rather than leaving it until the end – especially given the changes to pension contributions, Income Tax, Capital Gains Tax and the residence nil-rate band.
If you have any questions about planning for the future or would like more information about our services, please contact Wellesley Wealth Advisory on 01444 244551 or via email at firstname.lastname@example.org.