Preparation and planning is key to good money management. Knowing what’s coming up means you can prepare and adjust before things happen, rather than rushing to get things arranged at the last minute.
On 6 April the new tax year begins, so ahead of the inevitable flurry of advice in late March, here’s a look at the income-related changes that are on the way so that you can plan ahead.
Income tax rates themselves aren’t changing, but the bands are moving upwards. The personal allowance – what we can all earn before paying any income tax – is going up from £11,850 to £12,500.
Income is currently taxed at 20% for the first £34,500 you earn above the personal allowance. This basic rate tax band is increasing to £37,500 for 2019/20.
Combined with the increased personal allowance, this means you can earn up to £50,000 annually before reaching the higher rate tax bracket. Anyone earning more than this figure will therefore benefit from an extra £3,000 being taxed at 20% rather than 40%.
The higher rate (40%) tax band will cover earnings from £50,001 - £150,000, and income above this level will be charged at the additional rate tax band (45%), as it is currently.
The key to these changes is to do something with this extra money! Most people live to their means, spending what comes in, and of course the effect of inflation on goods is an ongoing concern. But this is in effect ‘extra money’ that we’re receiving, so even if you only get a little more, it should be put to good use.
That includes saving £1,000 minimum as an emergency reserve to cover you should something unexpected happen; paying down unsecured debts; investing it; or overpaying your mortgage.
Scotland sets its own rates of income tax. The personal allowance will also be £12,500 from 6 April, but other rates differ from the rest of the UK as follows:
- Income of £12,500-£14,549 will be taxed at 19% (known as the Starter Rate).
- Income of £14,549-£24,944 will be taxed at 20% (Scottish Basic Rate).
- Income of £24,944-£43,430 will be taxed at 21% (Intermediate Rate).
- Income of £43,430-£150,000 will be taxed at 41% (Higher Rate).
- Income above £150,000 will be taxed at 46% (Top Rate).
Thanks to auto-enrolment, employees are now all offered a workplace pension. Although contributions vary according to each company’s policy, currently your employer must contribute at least 2%, while you must add 3%.
These minimum contributions are rising in April: employers must pay 3% and employees 5%.
This shouldn’t be something that worries you, because it’s securing your future. The 5% includes tax relief, so in reality it’s 1.6% more coming out of your take-home pay.
I always encourage people to try to save 12.5% of their income towards retirement planning or overpaying their mortgage, which represents the first hour of an eight-hour working day. The new rules mean you’ll be at 8% as a minimum, pushing you towards this figure.
One final word here: if you’re self-employed then don’t leave yourself short on this target – make sure you’re planning for your future too. Pensions provider Penfold will soon launch a scheme specifically for the self-employed and those in the so-called gig economy, so there’s no excuse for leaving yourself out of pension planning, but in the meantime start saving into a stakeholder pension.
Capital Gains Tax
Capital gains allowance will rise to £12,000, from £11,700. This is applicable to any investment or asset sale gains, including rental properties.
We all have a £325,000 inheritance allowance that we can pass on tax-free on our death to an individual or trust, which remains unchanged in the next tax year.
In addition, if you own a home and pass this onto your direct descendants – essentially, your children or grandchildren – the tax-free allowance is changing, rising from £125,000 to £150,000.
What out here, that if you leave this portion of your estate to a trust, you may not get the residential nil rate band, this would cost your estate up to £120,000 in extra inheritance tax from April!
In April 2020 the residential nil rate band will rise again to £175,000, meaning that a couple will be able to pass on up to £1m tax-free to their children/grandchildren when their main residence is included as part of the inheritance.
Cash and stocks & shares ISA limits remain capped at £20,000 this year.
The Lifetime ISA annual allowance, a fantastic vehicle for saving towards a first home, also remains unchanged at £4,000.
The Junior ISA allowance will rise in line with CPI inflation to £4,368, up from £4,260.