Colin Dyer, from 1825, talks about the new tax year….
The 6th of April is a big date in the financial calendar. It’s the start of the new tax year; a time when any changes to the UK tax system are likely to come into play. It’s also a fresh start for your existing tax allowances and limits – which means it’s a time full of new financial planning opportunities for maximising your tax efficiency.
So what’s changing?
The 2017/18 tax year brings with it some increases to some of the most popular tax allowances, including ISAs, Junior ISAs (JISA), and your personal allowance which is how much you can earn each year before paying any income tax.
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 other big one is the introduction of a £100,000 Property nil rate band enhancement. The idea behind the new rate is that it should reduce people’s inheritance tax bill and make it easier to pass on the family home to direct descendants without a tax charge.
The existing inheritance tax threshold of £325,000 will be supplemented by the new band which will be phased in over 4 years, starting from today. You can read more about how this could help your inheritance tax bill in our nil-rate band blog.
Changes at a glance:
It’s all about (L)ISA
It looks like 2017/18 could be the tax year of the ISA. Allowances have soared and the government’s highly anticipated Lifetime ISA (LISA) launches today.
Anyone aged between 18 and 40 is free to pay up to £4,000 into a LISA, but any contributions will count towards your £20,000 ISA allowance. The difference from a normal ISA is that LISA savers will receive a 25% Government Bonus on anything paid in up to age 50. However, any bonus paid, plus any growth on it, will be lost if the LISA proceeds are withdrawn before age 60 – unless you use it to buy your first home.
We did a full analysis of the LISA when it was first announced last year, so if you’re thinking about opening one now it’s available (or know someone who is) it might be worth refreshing your memory.
Pension savings – open for business
I mentioned before that the new tax year provides a nice new start for your various tax allowances. One of the most important ones to think about is your 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!).
Last year saw big changes for the Annual Allowance. It used to be £40,000 for everyone, but from 6 April 2016 your allowance is dependent on your total level of income (including salary, bonus, property and dividends):
If your Annual Allowance is tapered under these new 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 and can help you save for the future in the most tax-efficient way possible.
The Money Purchase Annual Allowance (MPAA)
Talking of pension funding allowances, the MPAA is further limit on how much you can pay into a Money Purchase pension (such as a SIPP), but importantly it only applies once you access your pension for taxable income – tax-free cash doesn’t count.
HMRC introduced a £10,000 MPAA at the same time as pension freedoms to prevent unfair “recycling” by people taking pension benefits and then claiming further tax relief by putting the money back into their pension. From today, the MPAA is reducing to £4,000.
It can be quite complicated working out if you’re going to trigger the MPAA as there are several exemptions to the simple scenario I outlined above. If you’re worried about it, it’s a good idea to talk to your financial planner and they’ll be able to keep you right.
New year, new you
At 1825 we like anything that motivates people to get their finances in order and start planning for the future. And much like any other “fresh starts”, the new tax year can be a great time to delve into the detail of your financial situation.
If you’d like help to take advantage of the tax savings you’re entitled to, please speak to your Financial Planner.
This article was just a brief overview of the main tax changes to welcome you into the 2017/18 tax year. Tax can be complicated though, and how you’re treated will depend on your individual circumstances. Your 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. If you have any questions, your planner will be happy to help.
Laws and tax rules may change in the future and the information here is based on our understanding in April 2017. The information in this blog or any response to comments should not be regarded as financial advice.