Taking action early in the tax year allows your money to work harder – and out of the taxman’s reach – for longer.
The new tax year sees the introduction of a number of changes to taxation and savings and now might be a good time to review your plans, to understand what new opportunities exist and how any changes might affect you.
Individual Savings Accounts
April saw the annual allowance boosted significantly to £20,000.
One in four adults now invest in ISAs yet only 9% make full use of their allowance. 80% of subscriptions continue to be deposited in Cash ISAs¹, despite the record-low rates and the impact of rising inflation on the real value of cash.
The full tax saving and investment benefits of ISAs can only be achieved by investing for the long term, so it makes sense to use your allowance early in the tax year.
Following the Spring Budget, the government was forced to drop its planned rise to National Insurance contributions for the self-employed. This has triggered renewed speculation that pension tax relief is still in the firing line, as the government now needs to find other ways to raise the lost revenue.
A flat rate of pension tax relief has reportedly been ruled out, but a further cut in the annual pension allowance could be back on the table. Given the uncertainty, it seems sensible to make the most of the allowances and reliefs available now.
However, individuals over 55 who have already accessed their pension flexibly can now only contribute £4,000 a year to a pension – down from £10,000.
Only 34% of 25–34-year-olds now own a home, compared to 60% just 20 years ago².
The amount that can be invested for each child into a Junior ISA has increased to £4,128 for this tax year. An investment in a Junior ISA is locked in until the child is 18, at which point it is rolled over into a standard ISA. As well as offering a helping hand, gifting to children can also help older generations with their estate planning.
The nil-rate band remains frozen until 2020/21 and this tax year sees the phased introduction of the new residence nil-rate band, set at £100,000 per individual in 2017/18, rising to £175,000 in 2020/21. The combined allowances mean that from 2020/21, married couples with children could pass on up to £1 million free from Inheritance Tax, including the value of their family home.
Making gifts of up to £3,000 each year remains unchanged, providing a way to give loved ones a financial boost.
Savings and dividend income
One Budget surprise was the decision to cut the tax-free dividend allowance from £5,000 to £2,000 from April 2018. Although the benefits are reduced, it is still worth couples redistributing investments between them to maximise their allowances. But transferring assets to make the best possible use of ISA and pension allowances may be more important.
The Personal Savings Allowance remains untouched. It offers a nil-rate Income Tax band on bank or building society interest of £1,000 a year for basic rate taxpayers and £500 for higher rate taxpayers. While not providing a complete shelter from tax on interest, the availability of the allowance continues to prompt questions over the value of ISAs as a home for cash savings.
Employers and employees could be hit by new government rules on ‘optional remuneration arrangements’. Certain benefits are exempt and transitional rules apply for others, but the changes aim to tackle differences between the tax treatment of cash earnings and benefits, and could result in higher tax bills and National Insurance contributions.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
¹ HMRC, September 2016
² Office for National Statistics, 2015
To receive a complimentary guide covering wealth management, retirement planning or Inheritance Tax planning, contact Nick Clegg, Hampshire Financial Planning Ltd on 01489 232527 or firstname.lastname@example.org
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