The Personal Income Tax Allowance
In their manifesto, the Conservatives reaffirmed their goal of a £12,500 personal allowance by 2020/21. The announcement of a personal allowance of £11,850 for 2018/19 is another step towards this goal, albeit no more than was required by indexation.
However, many people do not use the current income tax personal allowance (£11,500 in 2017/18), and in 2018/19 there will be a gap of over £3,400 between the allowance and the starting point for National Insurance contributions (£8,424). At the other end of the income scale, some taxpayers will have no personal allowance in 2018/19 because their income exceeds £123,700, at which point their allowance is tapered to nil.
The Starting Rate Band
In 2016/17, the starting rate band for savings income was launched at £5,000 and a rate of 0%. No changes to the original band or rate have been made for 2018/19. The truth is that most people are not able to take advantage of the starting rate band: if your earnings and/or pension income exceed £16,850 in 2018/19, then that probably includes you. However, if you (or your partner) do qualify, you will need to ensure you have the right type of investment income to pay 0% tax.
ACTION
If you or your partner do not use the personal allowance to the full, you could be paying more tax than necessary. There are several ways to make sure you maximise use of your allowances:
- Choose the right investments: some investments do not allow you to reclaim tax paid while others are designed to give capital gain, not income.
- Couples should consider rebalancing investments so that each has enough income to cover their personal allowance.
- If one of you pays tax at no more than basic rate and the other is a non-taxpayer, check whether it is worth claiming the transferable married allowance (£1,150 in 2017/18, rising to £1,185 in 2018/19).
SAVINGS AND INVESTMENTS
Individual Savings Accounts (ISAs)
The annual ISA investment limit for 2018/19 is unchanged, so remains at £20,000. There will also be no change in the limit for the Lifetime ISA (LISA), which was launched earlier this year and has so far attracted much comment but only limited interest. The limit for the Junior ISA (JISA), which is attracting more university-fee-planning investors, will rise marginally from £4,128 to £4,260, as will the child trust fund (CTF) limit.
ISAs have long been one of the simplest ways to save tax, with nothing to report or claim on your tax return. The arrival of the LISA this year has complicated matters, as the new variant sits somewhere between the traditional ISA and a pension plan. If you are thinking of a LISA instead of either of these, you would be well advised to seek advice before taking any action.
Over time substantial sums can build up in ISAs: if you had maximised your ISA investment since they first became available in April 1999, you would by now have placed over £185,000 largely out of reach of UK taxes.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)
The Budget has announced that there will be a doubling of the amount an individual may invest under the EIS in a tax year to £2 million, provided any amount over £1 million is invested in one or more knowledge-intensive companies.
Interest in VCTs, EISs and SEISs has grown as more aggressive forms of tax planning have come under sustained (and largely successful) HMRC attack and pension opportunities have been further constrained.
The Dividend Allowance
The dividend allowance started life in 2016/17. At the time it was part of a reform of dividend taxation, ultimately designed to raise more revenue. The main target was private company shareholders who use dividends rather than salary to extract profits and thereby avoid National Insurance contributions.
The allowance means that in 2017/18 the first £5,000 of dividends you receive is not subject to any tax in your hands, regardless of your marginal income tax rate. Once the £5,000 allowance is exceeded, there is a tax charge, at a higher rate than in tax years before 2016/17. Like the personal savings allowance, the dividend allowance is really a nil rate band, so up to £5,000 of dividends do not disappear from your 2017/18 tax calculations, even though they are taxed at 0%.
This year’s Spring Budget announced that the allowance would be cut to £2,000 from 2018/19. At worst, this change could mean £975 more tax for a higher rate taxpayer and £1,143 more for an additional rate taxpayer.
ACTION
If you don’t anticipate using all your personal allowance or personal savings allowance in 2017/18 think about creating more income by closing deposit accounts before 6 April and crystallising the interest in this tax year. But beware early closure penalties and shutting down accounts with better interest rates than are available now!
For next tax year, think about who should own what in terms of investments and savings. The savings and (reduced) dividend allowances mean it is not simply a question of loading as much as possible on the lower rate taxpayer of a couple. In theory, you will each be able to receive an income of up to £19,850 a year tax free in 2018/19, but only if you have the right mix of earnings, savings income and dividends.
CAPITAL GAINS TAX
Capital gains are currently taxed as the top slice of income, but the rates are lower than those that apply to income not covered by allowances. Gains are generally taxable at 10% to the extent they fall in the basic rate band (£33,500 in 2017/18 and £34,500 in 2018/19) and 20% if they fall into the higher or additional rate bands. An additional 8% applies to gains on residential property and carried interest. For 2018/19, the capital gains tax annual exemption will rise by £400 to £11,700.
The tax rates and annual exemption mean that if you can arrange for your investment returns to be delivered in the form of capital gains rather than income, you will often pay no tax on your profits. While investment decisions should never be made on tax considerations alone, traditionally favouring capital gains over income when setting your investment goals has been a sensible approach. However, up to the (reducing) level of the dividend allowance, this is no longer automatically the case.
ACTION
If you do not use your £11,300 annual exemption by Thursday 5 April 2018, you will lose it and a possible tax saving of just over £3,100. If you have gains of over the exempt amount to realise, it could be worth deferring the excess until after 5 April to gain another annual exemption and defer the CGT bill until 31 January 2020.
INHERITANCE TAX
Residence Nil Rate Band
The Residence Nil Rate Band (RNRB) came into effect on 6 April 2017 with an initial figure of £100,000. For 2018/19 the RNRB will rise to £125,000, en route to reaching £175,000 in 2020/21, after which increases will be inflation-linked. It does help to ease the burden of IHT for many estates, but it is by no means a panacea. The government’s IHT tax take is still expected to carry on increasing according to the OBR projections.
ACTION
The arrival of the RNRB should have meant that you reviewed your Will. One of the stranger consequences of another nil rate band – albeit one only available at death – has been that it may require you to make gifts away from a surviving spouse or civil partner on first death, if you want to minimise your joint IHT bill.
Financial Advice Bristol
If you would like to speak with one of our Independent Financial Advisors and potentially receive financial advice, please contact us on 0117 923 7652. We are based in Clifton, Bristol but we are happy to service clients from across the UK and we provide free initial meetings at our client’s convenience.
Churchill Wealth Management Limited is located at 13 Alma Vale Rd, Bristol BS8 2HL, United Kingdom.
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