New tax year: what’s changed for 2018/19
Let’s look at what’s changed now we’re in the new tax year, which started on 6th April and brought with it a host of changes and new allowance limits.
Personal Allowance
This is the amount of money you receive tax-free on any income (salary or dividends) during the financial year, and it’s gone up this year to £11,850 (from £11,500).
If your income exceeds £100,000, that allowance starts tapering down up to £123,700, and over that amount you do not get a personal allowance. The thing to remember here is that between those two figures, your income is taxed at 60%, a massive take, so if you’re in that band then look at ways to reduce your income down below £100,000. Every pound you can reduce by will save you 60p in tax.
You can do this in a few ways:
- Personal pension contributions
- Charitable contributions
- Ask your employer to divert some of your salary/bonus into a pension
Income Tax
You’ll pay income tax of 20% for the first £34,500 you earn after the personal allowance (meaning an income of £46,350), and a rate of 40% after that up to £150,000. Income tax is 45% for annual income over that amount.
If you’re an employee then you’ll have National Insurance contributions (NICs) on top of that. You’ll pay 12% on income between £8,424 and £46,350, and 2% on income over that amount.
Your employer will now pay 13.8% on anything over £8,424 of income.
Dividend Allowance
Most business owners will pay themselves dividends, but the tax-free allowance this year is reducing from £5,000 to £2,000. If you’re a higher rate taxpayer, you’ll have around £1,000 more income tax to pay in your self-assessment.
Your dividends are taxed at 7.5% up to the higher rate threshold (£46,350), 32.5% up to the additional rate threshold (£150,000), and 38.1% after that.
If you’re affected by the change to the Dividend Allowance then I recommend speaking with your accountant to get a forecast of what your tax is likely to be for this year. It’s always good to be organised, which is Step 2 of The Money Plan.
Capital Gains Tax Allowance
This is £11,700 (for trusts it’s half of that) for the year. Remember that if you sell shares in your own business you get up to £10m at the entrepreneur’s rate of 10%, which is great.
Capital gains tax for everyone else is 10% for a basic rate taxpayer and 20% for a higher rate taxpayer.
Buy-to-let investors have been stung again, and will now be taxed with an extra 8% surcharge on top of those percentages. Buy-to-lets have been progressively more and more taxed in recent years.
Inheritance Tax (IHT)
The first £325,000 from anybody’s personal estate can be left tax-free. In addition, there’s the Residential Nil Rate Band (RNRB) which has now risen to £125,000 (up from £100,000).
That means that if you leave your main residence to a direct descendant, you have the £325,000 plus the RNRB of £125,000 as a tax-free inheritance allowance – and that’s per person. So for a couple you now have up to £900,000 IHT allowance.
The £125,000 RNRB limit is rising by £25,000 next tax year and the same again the following year, up to £175,000. That means in two years the combined estate for a couple can be £1m before attracting IHT.
ISAs
The ISA allowance remains at £20,000 for the year. Junior ISAs see a limit raise to £4,260, which are for those aged 18 or below (and child trust funds can be moved into a JISA).
There’s also the Lifetime ISA, for those aged between 18 and 40 years old, who can put £4,000 into a LISA which will attract a 25% government bonus and can be funded up to age 50. The money can be used for one of two purposes:
- Buying your first home, up to a value of £450,000
- Retirement from age 60 onwards
LISAs are an outstanding ISA if you’re in the eligible age bracket. You can access the money outside the above two parameters if needed, but you’ll be penalised and lose some of the value if you do, so that should be your path only in absolute emergencies.
Pensions
Auto-enrolment contributions have now increased. Everyone in such schemes will pay a minimum of 3% of their pensionable salary into a pension, with employer contributions rising to 2% (both increased from 1%).
The annual pension allowance is £40,000 for anyone earning up to £110,000. When you reach that figure, you need to look at your adjusted income – your total income from all sources, plus your pension contributions – and when that exceeds £150,000 your pension allowance starts tapering down, £1 for every £2 over that £150,000 threshold. At an income of £210,000+ for the year, your pension allowance therefore drops to £10,000.
That can make financial planning tricky if you don’t know exactly what you’ll earn until the tax year ends. If you expect to earn over £150,000 this year, then you should only fund £10,000 into your pension allowance and at the end of the tax year you can make a top-up payment.
The lifetime pension allowance – the amount you can save into pensions outside the state pension during your lifetime – is £1m. If you’ve got a defined benefit pension scheme you need to multiply your annual pension income by 20: so if your income will be £10,000, that counts £200,000 towards your lifetime allowance and you only have £800,000 left. Such schemes can take up a large chunk of your lifetime allowance (unless you’ve previously applied for protection)
Take action now
Use your allowances early! Start paying into your ISA or pension now, don’t leave it 12 months for one lump sum at the end of the tax year. Be in control of what’s going on.
Download my free guide to pensions vs ISAs vs GIAs
And finally…
I’ve been working my way around the country this year giving presentations on getting financially organised to groups of employees – big companies have asked me to come in on wellness days and training days, and I’ve also spoken to associations, clubs and groups.
If you have a company or club with around 20 or more people, I’m very happy to come out and present The Money Plan’s five steps. There’s no charge involved, I just want to help as many people as I can, and this is great for your staff or team. Feedback so far has been excellent.
I tailor each presentation to the audience so I can include any employee benefits. If you’re interested, please get in touch, I can give you clips from previous presentations and copies of slides so you can find out more about how it can help your people.
Useful links
Wayfinder – find a Certified Financial Planner
HMRC – income tax changes this year and in the past
The Pensions Regulator – UK regulator of workplace pension schemes
