The start of a new tax year is the perfect time to spring-clean your finances. Check out these tax changes to see whether you’ll be better or worse off in the year ahead
From a state pension rise that will boost retirees’ incomes to a rise in tax for car owners, we list the tax changes that will make a difference to the money you have in your wallet from 6 April onwards.
1 You’re likely to pay less income tax
From 6 April, most people will pay less income tax. The tax-free personal allowance is set to rise to £12,500 (from £11,850 in the 2018/19 tax year). This is the amount that most people will be able to earn before they pay any income tax. The rise should give basic-rate taxpayers a £130 boost.
The amount people earn before they pay higher-rate tax at 40% is also rising from £46,350 to £50,000. This will give higher-rate taxpayers an extra £860 a year and means there will be nearly one million fewer higher-rate taxpayers.
Additional-rate taxpayers will be taxed at 40% for any income between £50,000 and £150,000 and will still be taxed at 45% for income above £150,000. They will be £600 better off over the year.
The government says the changes will give 32 million people in England, Wales and Northern Ireland a tax cut. Visit Gov.scot/publications/scottish-income-tax-2019-2020 for details of income tax bands in Scotland. However, national insurance contribution (NIC) limits have also moved in line with the change in the income tax threshold.
As a consequence, higher earners will lose half their new-found tax gains as a result of the personal tax allowance rise.
People earning more than £46,350 currently pay 12% NICs on earnings up to that level but only 2% on higher amounts.
From 6 April, they will pay the full 12% rate of NICs on everything up to £50,000, as the upper earnings limit is hiked up. The 2% rate will only kick in on earnings above £50,000.
As a consequence, while tax payable on that slice will be reduced by 20%, NICs will go up by 10%, so the net gain is only 10%.
2 You will automatically pay more into your pension
Come April, you are likely to see a fall in your wage packet, but don’t worry as the money will go towards your pension.
Under auto-enrolment legislation, minimum contributions employers and staff pay must increase to bring the total minimum contribution to 8%.
Currently, contributions are 2% from the employer and 3% from the employee. This is now set to go up to 3% from the employer and 5% from the employee.
According to Hargreaves Lansdown, this means that someone on an average salary of £30,000 will see their take-home pay fall by £253 a year, while someone on £20,000 will see their net pay drop by £117 a year.
Under auto-enrolment, all eligible employees are signed up to their workplace pensions. Contributions are automatically deducted from their salary and are topped up by an employer contribution and tax relief unless they opt out of the scheme.
3 The state pension will rise by 2.6% in April
Those on a new state pension – which covers people who reached the state pension age from 6 April 2016 onwards – will see an increase of £4.25 a week or £220 a year. This means the full state pension will be worth £168.60 a week – or £8,767.20 a year – after rising from £164.35 a week, above the rate of inflation.
Those receiving the basic state pension – which applies to those who reached state pension age before 6 April 2016 – will get an increase of £3.25 a week, taking their pension up to £129.10 a week. This means they will get an extra £169 a year, giving them an annual income of £6,718.40.
The level of the state pension rises every year by 2.5%, the growth in average earnings or by inflation – whichever is higher. Known as the triple lock, it gives retirees a guaranteed rise in income every year.
4 Pension lifetime allowance will rise
The lifetime allowance will rise in line with inflation to £1,055,000 from April.
This is a limit on the amount of money you can hold in a pension without paying an extra tax charge.
Your pension benefits are tested against the lifetime allowance when you start to draw them from the scheme.
You will only start to pay tax charges when your pension savings go above it. This is 55% if you take the money as a lump sum or 25% if you take it as income. These figures have been set so that the tax paid is broadly the same however you take the money.
5 Inheritance tax on property will fall
Inheritance tax is paid on an estate – property, money and other assets after any debts or funeral expenses – when someone dies.
It is payable when the assets of an estate total more than £325,000. This is known as the nil-rate band. Any assets above £325,000 are liable to a tax of 40%.
In the new tax year, the main £325,000 allowance along with the 40% tax rate is set to stay the same.
However, the property nil-rate band is set to rise from £125,000 to £150,000 per person when they leave their home to a direct descendant who can be their child, grandchild, adopted or foster child, or stepchild. This means that in the 2019/20 tax year, your inheritance tax threshold will be £475,000 (£325,000 plus £150,000) if you plan to leave property to your descendants.
On properties worth over £2 million, homeowners will lose the allowance by £1 for every £2 they are over the limit.
6 Probate fees will rise for estates worth more than £50,000
Grieving families could be hit with bills of up to £6,000 when probate fees go up in April.
Probate fees give legal control to the family over the estate of someone when they pass away.
Currently, a flat fee of £215 applies in England and Wales – or £155 if you use a solicitor – on estates above £5,000.
The threshold is set to be lifted to £50,000 from April – lifting 25,000 estates out of fees a year, according to the Ministry of Justice. However, if the estate is above this you will see a rise in probate fees. Estates valued between £50,000 to £300,000 will be charged £250, going up to a maximum £6,000 for estates worth more than £2 million.
Those with larger estates could see costs soar. According to figures from wealth management firm Quilter, a £500,000 estate would pay more than 10 times the current fee at £2,500 while those in the top tier will pay 3,771% more.
The government says that for those who do pay, around 80% of estates will pay £750 or less.
The changes will not apply in Scotland and Northern Ireland, which have their own probate fees.
7 Low-paid workers could get a pay rise
The national living wage, the statutory minimum for workers aged 25 and over, will increase by 4.9% to £8.21 an hour from April. This 38p rise means workers on the minimum wage will see their wages rise faster than the rate of inflation – boosting wages by around £700 a year on average.
Rates for younger workers will also increase above inflation and average earnings. Those aged 21 to 24 will see the minimum wage climb from £7.38 to £7.70, while 18- to 20-year-olds will see a rise of 25p to £6.15 an hour. For people aged 18 and below their money will go up by 15p to £4.25. The minimum wage for apprentices is also increasing from £3.70 to £3.90.
8 The amount you can save in a Junior Isa is rising
Isa limits are set to remain the same in the 2019/20 tax year at £20,000. The good news is that the Junior Isa (Jisa) limit is going up in line with CPI inflation from £4,260 to £4,368.
If you have a child, or grandchild, aged under 16 they can have a Jisa. All gains are tax-free, but any money paid in cannot be accessed until the child turns 18.
9 Car tax will cost more for most motorists
The bad news for drivers is that car tax will go up in April.
The amount of car tax you pay in the UK depends on when you bought your car and the specific emission levels.
Vehicle Excise Duty (VED) was first introduced in 2017 as a replacement for the flat-rate tax system and is based on CO2 emissions. Cars registered before April 2017 will see an increase of up to £15 a year if they produce emissions over 150g/km, bringing the total tax paid to £530 a year. Only electric vehicles and those producing less than 120g/km of CO2 will not have to pay more.
However, for new cars registered after 1 April 2019 the VED rate will rise by up to £65 if the vehicle has CO2 emissions over 255g/km, bringing their annual car tax to £2,135.
Cars registered after 2017 will also have to pay a higher VED. For petrol and diesel cars the standard rate is going up from £140 to £145, while for hybrids its going up from £130 to £135.
You can find out more about how much you should pay for car tax at Gov.uk/vehicle-tax-rate-tables.
10 Buy to let will become less profitable
Mortgage tax relief for buy-to-let landlords is gradually being phased out since new rules were introduced in the 2017-18 tax year.
From 6 April, landlords can only deduct 25% mortgage interest payments from their rental income – down from 50% in the previous tax year.
The changes are being introduced gradually year by year and by April 2020 landlords won’t be able to deduct any mortgage interest payments from their rental income. After this, landlords will only be able to claim a 20% tax credit on mortgage interest.
This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.
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