11th May 2017 at 7:00am
April begins the new tax year and is the ideal time to take a look at your finances.
Here’s our round-up of the tax changes you need to know about, updated to take into account changes to the Finance Bill in April 2017.
1 Income tax thresholds have gone up
You could keep more of your income this tax year thanks to increases in income-tax thresholds.
Higher rate tax will not be paid until income exceeds £45k, an increase of £2k over last year.
There is no change to the additional rate threshold, which remains at £150k for all of the UK.
If you want to save tax efficiently, a pension contribution can reduce the amount of tax you pay on your income. If you have income over £100,000 a year it may also reinstate your personal allowance, allowing more of your income to be taxed at 0%.
2 You now have a £20k ISA allowance
A leap in the annual ISA allowance from £15,240 to £20,000 means you can save considerably more in a tax-efficient place – there is no further tax on income and no capital gains tax on ISA savings.
You can pay your allowance into a Stocks and Shares ISA, a Cash ISA, or a combination of both in any proportion. The Junior ISA allowance is also higher at £4,128, up from £4,080. Children cannot normally access these savings until they turn 18.
Many people often wait until the end of the tax year to pay into their ISAs but leaving it late means you miss out on the potential for tax-free growth.
3 Lifetime ISA arrives to help first-time buyers
Still on the subject of ISAs, if you’re aged 18-40 a new savings option arrives to help you – or a family member – get on the property ladder or top-up pension savings.
You can pay up to £4,000 a year into a Lifetime ISA (also known as the LISA) and get a 25% government bonus.
There are rules around when you can take your money out and hefty penalties can apply which you need to be aware of. Read more about this in What is a Lifetime ISA?
The good news is you can combine the Lifetime ISA with other ISAs, as long as it’s within the annual £20,000 limit. But if you are in a workplace pension, switching your pension payments to a LISA could mean you miss out on valuable employer contributions.
4 New inheritance tax residence nil rate band
When you die, you will be entitled to an additional nil rate band of £100,000* on top of the ordinary nil rate band of £325,000 if you leave your family home to your children or grandchildren. And if your spouse/civil partner died before the start of this tax year, you may also be able to claim their additional nil rate band too.
This year, it could mean an additional £200,000 of your estate will be free from IHT, potentially boosting your family’s inheritance by £80,000.
The allowance will be reduced if the value of your estate is over £2m when you die, and for 2017-18 will be lost if your estate is worth more than £2.2m. This may influence how couples plan their estates and write their wills. Perhaps now is a good time to revisit yours?
*Rising to £175,000 by 2020/21
5 New tax break for micro-entrepreneurs put on hold
Two new £1,000 allowances for the sharing economy were put on hold when they were dropped from the Finance Bill.
If you’re selling online or renting out a room for the holidays you are still due to pay tax on the first £1,000 of income you receive. This could change under the new Parliament.
6 Money Purchase Annual Allowance cut has been shelved
The Money Purchase Annual Allowance (MPAA) was due to reduce from £10,000 to £4,000 from this year.
This change has now been dropped from the Finance Bill following the announcement of the general election in June, but could be reconsidered later in the year when the new Parliament begins.
The MPAA limits how much can be paid into a pension tax efficiently and will apply if you have started to take taxable income from your defined contribution pension scheme, for example a SIPP.
This doesn’t apply if you have only taken your tax-free cash or you started taking income under capped drawdown before 6 April 2015.
7 Don’t forget about the marriage allowance
The Marriage Allowance lets one half of a couple with income of less than the £11,500 threshold to pass on some of their unused personal allowance to their spouse or civil partner. This year’s allowance is up by £50 to £1,150.
Often overlooked as a tax break, it can be worth up to £230 every tax year for a couple.
Apply for it on Gov.uk.
8 Cut in tax relief for buy-to-let landlords
Tax relief on buy-to-let mortgages has been cut to 75% of the finance costs, with the remaining 25% as a basic-rate tax reduction. By 2020, costs to finance a buy-to-let will only be eligible for basic-rate tax reduction.
Bringing it all together…
As ever, when it comes to tax we recommend speaking with your adviser to make the most of what you’re entitled to, particularly when your circumstances or the tax laws change.
The information in this blog or any response to comments should not be taken as financial advice and is based on our understanding in May 2017. It updates an earlier article published April 2017 to take into account changes in the Finance Bill. Laws and tax rules may change in the future.