The Chancellor’s last budget wasn’t as radical as some had predicted; the pension Annual Allowance, fortunately, wasn’t cut, for one. However, there were a few changes to pay attention to. April 6th was the beginning of a new tax year and when most of these changes came into force. So, if you’ve not noticed the difference already, here’s everything you need to know.
1. Income Tax
The Personal Allowance increased from £11,850 to £12,500, which is great news for all. Even better, the Higher Rate threshold rose from £46,350 to £50,000, an increase of nearly 8%.
If you’ve been to University in the last few years, the threshold for repaying Student Loans has also increased slightly, meaning a few more pounds in your pocket.
2. Auto-enrolment contributions
Whilst you are being taxed less, you might not have seen much of a change in your take-home pay. Why? If you’re part of a workplace pension your minimum contribution rose from 2% to 3% of your relevant earnings.
Even better, your employer’s minimum contribution also increased from 3% to 5%; effectively a small pay rise! In the long term, this is excellent news. With compounding growth over time, the earlier you start paying into a pension, the better.
3. Pension allowances
The pension Annual Allowance (the most you can tax-efficiently contribute each year) remains at the equivalent of your earnings, up to a maximum of £40,000. No change there.
The Lifetime Allowance (the maximum value your pension can be, without attracting a tax charge when taking income or turning 75), has increased. Last year it was £1.03 million, this year it’s £1.055 million. If you can, it’s often wise to use as many of your pension allowances as possible.
4. Inheritance Tax
With planning in place, Inheritance Tax (IHT) is largely avoidable. Rated the least popular tax of all in the UK, IHT is typically charged at 40% on the value of your estate above a certain value. In 2019/20 the Nil Rate Band remains the same at £325,000, but the residence Nil Rate Band has increased from £125,000 to £150,000.
This now gives you a total of up to £475,000 per person, or up to £950,000 for a married or civil partnership couple. The value of your assets, including your home, would be liable for IHT above that, but there are many ways to circumvent it.
Making gifts to loved ones is one of the simplest ways to reduce the value of your estate. The annual gift allowance lets you give up to £3,000, which is immediately outside of your estate for IHT purposes. Unused allowance can be carried over for just one year, so now’s a good time to share some wealth with loved ones if IHT is a concern.
There is also a ‘seven-year rule’, meaning gifts of any value are exempt from IHT if you live for at least seven years after making the gift (assuming you no longer benefit from it). Or, you can make gifts out of your usual income – this is immediately exempt, but a little complex.
There are several other ways to mitigate IHT. If you’d like to discuss them, give us a call.
5. Capital Gains Tax
You don’t have to pay Capital Gains Tax (CGT) on qualifying assets you sell and make a profit on, up to £12,000 in this tax year.
Called the Annual Exempt Amount, it’s increased from £11,700 in 2018/19. Assets that are jointly owned can use both of your allowances, meaning a potential £24,000 gain can be made in the year without attracting CGT.
6. ISA allowances
Your Individual Savings Account (ISA) allowance hasn’t changed from last year – it’s still £20,000. But, your child’s allowance has gone up. The Junior ISA allowance for under 18s has risen from £4,260 to £4,368.
ISAs are free of Capital Gains and Income Tax, so offer an excellent, tax-efficient way to save for the future. The ISA allowance is a use-it-or-lose-it opportunity as it doesn’t roll over from one year to another. Make sure it doesn’t pass you by. Using your allowance early in the tax year gives your investment the longest opportunity to grow tax-free.
7. Buy to Let tax
Finally, if you’re a Buy to Let investor the news isn’t so good.
In 2015, former Chancellor George Osborne announced a shock tax change that removed a landlord’s ability to deduct mortgage interest from rental income, when calculating the profit that tax is liable on.
The changes were phased in from 2017 and, in this tax year, only 50% of mortgage interest can be deducted against rental income to calculate profits. This will decrease by 25% each year until it’s finally zero in 2020.
Tax is due on turnover, not profit. If mortgage rates rise, but rents don’t, you could be quickly left out of pocket. For Higher-Rate taxpayers with a relatively large mortgage, the tax charge might actually exceed any returns by 2020, creating a net loss.
The Financial Conduct Authority does not regulate tax advice or buy to let properties. Reference to tax treatment depends on the individual circumstances of each client and may be subject to change in future.
So, it’s mostly good news, but there’s a sting in the tail if you’re a property investor. If you’d like to discuss making the best use of your personal allowances, tax planning opportunities, or your pensions and investments, email us at admin@stongegatewealth.co.uk or give us a call on (01785) 876222.
Production
