As 6th April approaches we inevitably face a transition into new rules within the UK’s tax regime. For those looking to optimise their tax position, what forward planning can you do?
New thresholds
In our previous article, we have already talked about how the Personal Allowance is set to rise from £11,850 in 2018-19 to £12,500 from 6th April 2019. This follows a general rise in the Personal Allowance over the past 5 years. In 2012-13, for instance, it stood at just over £8,000.
In practical terms, this means that Basic Rate taxpayers can expect to take home an extra £130 in 2019-20. Higher Rate taxpayers will also see the Higher Rate threshold rise to £50,000, which amounts to an additional £860 for 2019-20.
However, working age employees will also face a 12% National Insurance contribution on earnings between £46,350 and £50,000. For Higher Rate taxpayers, therefore, the rise in their threshold will be offset to some degree. From April 2020, both the Basic and Higher Rate thresholds will be frozen and then will rise with inflation from April 2021.
Please bear in mind that the above only applies in England, Wales and Northern Ireland. Residents in Scotland face different rules due to the devolution of tax policy.
Capital Gains
Another important change for the 2019-20 financial year is the planned rise in the Personal Allowance for Capital Gains Tax (CGT). From April 6th, the threshold will rise to £12,000 – allowing you generate £300 more in profits before you are liable to Capital Gains Tax.
Similarly to the Personal Allowance for Income Tax, this gradual rise in the Capital Gains Allowance follows a broad trend since 2014-15 when it stood at £11,000.
The important thing to remember with this aspect of taxation is that losses you make on sales can be offset against your capital gains for tax purposes.
Please remember also, that different CGT rates apply to different people, depending on the asset in question and your Income Tax bracket. For instance, Basic Rate taxpayers pay 18% on property capital gains whilst for Higher Rate taxpayers it is 28%.
Lettings Relief
The system governing Lettings Relief is also set to be changed. (This is the system which previously allowed you to let out and live in your home whilst avoiding CGT).
The new plans are not set fully in stone yet, and are expected to be implemented in 2020. However, the essential thrust of it seems to be that Lettings Relief will only be available if you are a landlord inhabiting your property with a lodger.
The final period relief will also be cut down from 18 months to 9 (unless you are in a care home or disabled, in which case the present period of 36 months should remain in place).
At the moment, the total Lettings Relief you can claim is the lowest of either:
• £40,000;
• The total you can claim for private residence relief;
• The amount you generate from letting out the relevant part of your home.
Bear all of this in mind if you are considering expanding your investment portfolio into property. We recommend consulting with us before making any important decisions in this area.
You should also consult if you previously lived in a property and then rented it out. It is possible that these new plans will present you with a higher CGT bill.
Personal savings
You have been allowed to grow your cash, tax-free, through interest on your savings since April 2016 when the Personal Savings Allowance was introduced.
Essentially, this means that you can earn up to £1,000 per year in interest without it being taxed on the Basic Rate (if you are a Basic Rate taxpayer). For Higher Rate earners you can earn up to £500 interest per year without tax, after which any interest will be taxed at 40%.
Be mindful that interest you earn on your savings can sometimes push you into a higher tax bracket. For instance, suppose in 2018-2019 your salary earned up to £46,350, therefore putting your income in the Basic Rate. Suppose also that the interest on your savings took you into the Higher Rate.
In this case, you would only be allowed a £500 personal savings allowance. This would mean that the rest of the interest would be taxed at 40%. If you think this might affect you, do also remember that the Higher Rate threshold will rise to £50,000 in 2019-2020.
This means that in an example like the above, you might not be tipped into the Higher Rate if the example were to occur in the 2019-20 tax year. If you are at all unsure about your own situation, please speak to us.
Allowances
If you are married and at least one of you was born before 6 April 1935, then you are likely eligible for the Married Couple’s Allowance. This is set to increase to £8,915.
Another important area of allowances to highlight is that spouses and civil partners will be able to transfer £1,250 of their Personal Savings Allowance to their spouse or civil partner, provided that neither of you pay above the Basic Rate of Income Tax after the transfer is complete.
The key takeaway here is that, if you can legitimately shift income from a Higher Rate Tax paying spouse/civil partner to one on the Basic Rate (or none), then it would be sensible to explore this in more depth.
