As another year rolls to an end, many people will find themselves looking forward to what 2018 may bring.
For some, it may be taking up a new hobby, for others, kicking a bad habit. For everyone, however, 2018 will bring a host of changes to allowances, rules and legislation that will impact their personal finances.
These changes won’t take effect until April 6th; the beginning of the new tax year. However, being prepared and informed will ensure that you can make the most of any opportunities that may benefit you. Equally, being aware of any changes that could leave you worse off (such as paying unnecessary tax) will allow you to plan well in advance, allowing you to start the year as you mean to go on.
1. Increased Personal Allowance
Let’s start with some good news; the Personal Allowance is increasing from £11,500 to £11,850 (Source: Gov.UK).
This is the amount that can be earned each year without incurring Income Tax. Whilst it is said that only two things are certain in life, many will be pleased to hear that one of them is now going to be relaxed somewhat. Unfortunately, the Government can’t do much about the other one.
This increase marks the first stage of the Government’s plan to raise the Personal Allowance to £12,500 by 2020, saving people:
- £350 in the 2018/19 tax year
- £1,000 in the 2019/20 tax year
2. Dividend Allowance decrease
Next, some bad news. Well, for business owners, contractors and the self-employed at least.
Announced in the 2017 Spring Budget, the dividend tax-free allowance is set to fall from £5,000 to £2,000 in April. This will see tax being paid on annual dividends of more than £2,000, which is predicted to raise £930 million for the Government (source: Gov.UK).
The changes will see someone who receives a £5,000 divided pay an extra:
- £225 if they are a basic-rate taxpayer
- £975 if they are a higher-rate taxpayer
3. Higher Lifetime Allowance
Back to some good news. From April, the Lifetime Allowance will rise from £1 million to £1.03 million (Source: Gov.UK)
The Lifetime Allowance is a limit on how much you can draw from your income without incurring tax, which at the time of writing is:
- 25% lifetime allowance charge applies to funds in excess of pension income above the lifetime allowance if they are placed in drawdown or used for annuity purchase
- 55% lifetime allowance charge applies to excess funds if they are withdrawn as lump sums
This allowance increase is a response to relatively high inflation in the later months of 2017, reaching a high of 3%. This will be good news for those who rely on a pension, and offers those saving for retirement an opportunity to save more for the future.
4. Help to Buy ISA to Lifetime ISA transfer deadline
When the Lifetime ISA was launched at the start of the 2017/18 tax year, it offered a chance to double the Government bonus by transferring money in from a Help to Buy ISA. This came with the added benefit of not affecting the annual ISA allowance, giving those saving for a home deposit or retirement a rare chance to maximise their contributions.
The deadline for any transfers to a Lifetime ISA is April 6th 2018. If you hold both a Lifetime ISA and a Help to Buy ISA, it is worth noting that only one can be used to pay for a home deposit, so any transfers should be completed in plenty of time to avoid missing out.
5. Higher Income Tax rates in Scotland
The next change only affects Scottish taxpayers, and will receive a mixed reaction based on the Income Tax band they fall into.
Lower earners will see themselves paying less tax, whereas those earning over £44,273 will see themselves paying more. The earned / pension income tax bands for the 2017/18 year are:
- Up to £11,500: Tax-free Personal Allowance
- £11,501 to £43,000: 20%
- £43,001 to £150,000: 40%
- over £150,000: 45%
However, from April 2018, the earned / pension income bands will change to:
- Up to £11,850: Tax-free Personal Allowance
- £11,850-£13,850: 19%
- £13,850-£24,000: 20%
- £24,000-£44,273: 21%
- £44,273-£150,000: 41%
- Above £150,000: 46%
6. Auto-enrolment contributions increase
Eligible employees who are not yet part of a workplace pension scheme will find themselves enrolled by February 2018 at the latest. This will give them a way to save for their future, whilst benefitting from contributions made by:
- Their employer
- The Government (in the form of tax relief)
Currently, the minimum contribution for both the employee and employer is 1% of qualifying earnings (which are calculated based on level of income). From April, this will increase to:
- 2% employer contribution (rising to 3% in April 2019)
- 3% employee contribution (rising to 5% in April 2019)
This will give employees who are serious about saving for the future a much-needed boost to their pension pot. Those who do not wish to be part of the workplace pension can opt out.
7. State Pension Increase
Ending on a good note (for pensioners at least), the State Pension will increase by 3%.
As part of the ‘triple lock’ policy that was kept in place after much deliberation in the 2017 General Election, the State Pension increases each year by whichever is the higher out of:
- The rate of inflation as measured by the Consumer Price Index (CPI)
- Average earnings
As inflation reached 3% in 2017, the State Pension will rise in line with it. This will see those receiving the full State Pension benefitting from an extra £4.80 per week (or nearly £250 per year).
How have the changes affected you?
With seven key changes (some good, others not so much), now is the perfect time to look at how they will affect your personal finances.
Staying informed can ensure that you aren’t caught out by any of the new allowance or rule changes, helping you start the new year as you mean to go on.
For more information on how the new tax year will affect you, feel free to get in touch with us on 0207 808 4120.