Taking action early in the tax year allows your money to work harder – and out of the taxman’s reach – for longer.
The new tax year sees the introduction of a number of changes to taxation and savings. Faced with a tax system that seems to be ever more complicated, now might be a good time to review your plans, to understand what new opportunities exist and how any changes might affect you.
Individual Savings Accounts
April marked the 18th birthday of the Individual Savings Account and saw the annual allowance boosted significantly to £20,000 – an increase of over 30%.
One in four adults now invest in an ISA, yet only 9% of ISA investors make full use of their allowance. What’s more, 80% of subscriptions continue to be deposited in Cash ISAs¹, despite the record-low rates on offer and the impact of rising inflation on the real value of cash.
The full tax saving and investment benefits of ISAs can only be achieved by investing for the long term, so it makes sense to use your allowance early in the tax year to put your money to work – and out of the taxman’s reach – for longer.
Following the Spring Budget, the government was forced to drop its planned rise to National Insurance contributions for the self-employed. This has triggered renewed speculation that pension tax relief is still in the firing line, as the government now needs to find other ways to raise the lost revenue.
A flat rate of pension tax relief has reportedly been ruled out, but a further cut in the annual pension allowance could be back on the table. Given the uncertainty, it seems sensible to make the most of the allowances and reliefs available now.
The financial challenges facing younger generations are well-documented. Only 34% of 25–34-year-olds now own a home, compared to 60% just 20 years ago². University students will graduate with an average debt of £44,000³.
The amount that can be invested for each child into a Junior ISA has increased to £4,128 for this tax year. An investment in a Junior ISA is locked in until the child is 18, at which point it is rolled over into a standard ISA. As well as offering a helping hand, gifting to children can also help older generations with their estate planning.
The nil-rate band will remain frozen until 2020/21, but the new tax year sees the phased introduction of the new residence nil-rate band, set at £100,000 per individual in 2017/18, but rising to £175,000 in 2020/21. The combined allowances mean that, from 2020/21, married couples with children could pass on up to £1 million free from Inheritance Tax, including the value of their family home.
The rules, which could have a significant impact on estate planning, are complex and not everyone will benefit. For instance, estates worth £2 million or more will see the new allowance gradually tapered.
However, the opportunity to make gifts of up to £3,000 each year remains unchanged, providing a way to give loved ones a financial boost and the chance to see them enjoy it.
Savings and dividend income
One Budget surprise was the decision to cut the tax-free dividend allowance from £5,000 to £2,000 from April 2018. Although the benefits are reduced, it is still worth couples redistributing investments between them to maximise their allowances. But transferring assets to make the best possible use of ISA and pension allowances may be more important.
The Personal Savings Allowance remains untouched. It offers a nil-rate Income Tax band on bank or building society interest of £1,000 a year for basic rate taxpayers and £500 for those paying at the higher rate. While not providing a complete shelter from tax on interest, the availability of the allowance continues to prompt questions over the value of ISAs as a home for cash savings.
New rules introduced in April mean that non-UK domiciled individuals who have lived in the UK for at least 15 of the last 20 years will now be considered UK domiciled for Income Tax and Capital Gains Tax purposes, as well as for IHT.
The new rules are complicated and could hit affected individuals hard, but there are steps that can be taken to help lessen their impact.
Employers and employees could be hit by new government rules on ‘optional remuneration arrangements’. Certain benefits are exempt and transitional rules apply for others, but the changes aim to tackle differences between the tax treatment of cash earnings and benefits, and could result in higher tax bills and National Insurance contributions.
¹ HMRC, September 2016
² Office for National Statistics, 2015
³ Sutton Trust, April 2016
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested. An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.