There were no street parties, wild celebrations or news flashes to mark the start of the new tax-year on 6th April. But, it heralded a series of changes at least one of which, we can almost guarantee, will affect everyone who reads this.
Some of the changes are positive (free money for some first-time buyers), others will take money directly from your pocket in the form of higher taxes (buy to let landlords take note).
So here they are, our six changes you need to know about:
1. Buy to let taxation
From 6th April 2017, the way in which buy to let landlords are taxed is changing. For years, property investors with mortgages have been able to off-set their interest payments against their rent. This reduced their profit and consequently the amount of tax they paid.
Highly geared landlords and those who are higher rate taxpayers will be hardest hit.
Before taking any action, you should calculate how much (if anything) the changes will cost you. There is a handy calculator on the Telegraph website, which will do this for you; click here to use it now.
If you will be hit with a higher tax bill, we’ve previously written about the possible steps you could take. Click here to read that article.
2. Free money for first time buyers
If you are under 40, and saving for a deposit on your first home, the Lifetime ISA, or LISA for short, is probably the biggest change of the new tax-year.
We explain more about the LISA here , but essentially, if you are a first-time buyer, saving for a deposit, it will help you get there faster. For every £1,000 you save, up to a maximum of £4,000 per year, the government will add £250.
If you’re a couple saving for your first home, that means a £2,000 bonus for every £8,000 you put away. There are several catches and things you need to be aware of, which we cover in our article, but using a LISA really is a no-brainer for eligible first-time buyers.
3. A higher Personal Allowance
The amount you can earn before you start to pay tax, known as the Personal Allowance, was increased at the start of the new tax-year.
Everyone can now earn £11,500 before they start to pay tax.
4. A one year windows for shareholders
The way shareholders pay tax is changing.
The term: “shareholders” conjures images of fact cat FTSE 100 bosses, but most people who are affected are small business owners, investors and pensioners.
Last year the government introduced the Dividend Tax Allowance, which allowed individuals to take £5,000 of dividends tax free each year. Any dividends above this amount are taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
Despite the introduction of the £5,000 tax-free allowance, this change resulted in higher tax bills for many people, especially those running their own companies.
And, it’s being changed again! The 2017/18 tax year, starting on 6th April, is the final year of the £5,000 allowance. From 6th April 2018, it will be cut to just £2,000; potentially costing those affected hundreds of pounds each year.
That gives shareholders just under a year to adjust to the changes and decide if their dividend strategy needs to be changed.
5. A higher ISA Allowance
It’s true to say the ex-Chancellor, George Osborne, was a huge fan of ISAs. Hardly a Budget went by without a change designed to promote them.
We now have a wider family of ISAs, including the new LISA and Innovative Finance ISA (essentially peer to peer lending in a tax-free wrapper) but also a higher annual allowance.
From 6th April savers and investors can now pay £20,000 each year into their ISA. That represents a large increase from the maximum contribution of £15,240 in the previous tax-year and a huge opportunity to shelter more savings and investments from tax.
Finally on this, if you plan to use your ISA allowance it’s sensible to do so at the start of the tax-year. Why wait until April next year to shelter your capital from tax? Start now and get an extra 300 days of tax-efficient returns.
6. Marriage Allowance
The often-overlooked Marriage Allowance rose from £1,100 to £1,150 on 6th April.
The Marriage Allowance is available if:
- You or your partner earns less than £11,500 per year
- The other one of you earns between £11,500 and 45,000
If you are eligible the lower earner can transfer up to £1,150 of their Personal Allowance to the higher earner. This reduces their tax bill by 20% of the amount transferred.
7. Lower Inheritance Tax bills
The 6th April saw the introduction of the ‘Residence Nil Rate Band’, which will ultimately decrease the amount of Inheritance Tax (IHT) paid by many estates.
To qualify an individual must have died after 6th April 2017 and own a home, or share of one. Furthermore, the value of the estate cannot exceed £2 million and the deceased direct descendants, such as children or grandchildren, must inherit the property.
The new tax-free band will sit on top of the existing £325,000 allowance (doubled for married couples and civil partners). It will be set as follows, for deaths in:
- 2017 / 18 £100,000
- 2018 / 19 £125,000
- 2019 / 2020 £150,000
- 2020 / 2021 £175,000
Get in touch
The end of the tax-year is always the traditional time for a financial makeover.
But, why wait another 11 months? There are plenty of changes happening now which will affect your personal finances. It’s therefore the perfect time for a financial review, if you would like to chat about how these changes affect you, please get in touch.