As the tax-year end looms, AJ Bell analysts Laura Suter and Tom Selby look at the changes that April 6th will bring for personal finances.
1. Increase in income tax allowances
2. Savers get a rise in tax-free allowances
3. Increase in residence nil rate band
4. Automatic enrolment contributions hike
5. Flat-rate state pension rising to £168.60 a week
6. Mortgage interest relief cut for landlords
7. Student loan threshold increases
Income tax allowances will make many richer
Laura Suter, personal finance analyst at AJ Bell, said: “Many of the population will get a pay-rise in April, when the amount everyone can earn before paying income tax is increased from £11,850 to £12,500, while the amount you earn before hitting the higher-rate tax band will rise from £46,350 to £50,000. The Government estimates that this will give a boost for 32 million people.
“However, before people start planning how to spend their windfall they need to check the small print, as those benefitting from the higher-rate band increase will be hit by an increased National Insurance bill. Employees pay 12% National Insurance up to an upper earnings limit, after which it is reduced to 2%. This upper earnings limit is linked to the higher-rate tax band, meaning employees will now pay the 12% rate on their earnings between £46,350 to £50,000 – rather than the 2% previously. This move wipes out a big chunk of the tax gain from the income tax break.”
Tax-free allowances rise for savers
Laura Suter: “A hike in a few tax-free allowances will boost people’s finances. While the main ISA annual allowance will stay at £20,000, from April 6th the amount people can put into a Junior ISA will increase to £4,368 – or £364 a month for those with regular monthly payments. Meanwhile, the amount of capital gains you can bank in a year before paying tax will rise from £11,700 to £12,000.
“The pension lifetime allowance is set for a small uplift from April 6th too, meaning the amount you can save into your pension in your life will rise from £1,030,000 to £1,055,000 in line with the CPI measure of inflation.”
Increase in residence nil rate band for inheritance tax
Laura Suter: “While the tax-free amount for inheritance tax purposes has been stuck at £325,000 since 2009, the new residence nil-rate band gives a boost to anyone passing on their home – and it will rise again this April.
“From April 2017 those with a residential property were given an extra £100,000 inheritance-tax-free allowance, increasing to £125,000 last year and from April 6th this will increase again to £150,000.
“However, there is tricky small print with this allowance, as the property must be left to direct descendants, so a child, grandchild, or their spouse. Anyone with an estate valued at more than £2m will also start to lose the allowance by £1 for every £2 they are over this limit.”
Automatic enrolment contributions hike
Tom Selby, senior analyst at AJ Bell: “The Government’s flagship auto-enrolment reform programme will see minimum contributions rise from 5% to 8% of qualifying earnings in April.
“This means someone earning around £30,000 and paying in the auto-enrolment minimum will see their personal contribution rise from about £575 to more than £955 for the 2019/20 tax year.
“Although some savers will inevitably feel the pinch at this point, early indications suggest opt-outs are unlikely to surge to worrying levels. This should be helped along by the fact wages have been rising, meaning many people won’t see their nominal take-home pay fall.
“Anyone considering quitting their workplace pension should think long and hard about the long-term implications of that decision. With life expectancy at birth now at 79 for men and over 80 for women, we will all need to make our money stretch further in retirement.
“Turning down the free money on offer through workplace pensions is a bit like shooting yourself in the foot just before starting a marathon. While for those struggling to make ends meet it may be necessary, nobody should opt for what is effectively a voluntary pay cut lightly.”
Flat-rate state pension rises to £168.60 a week
Tom Selby: “Anyone in receipt of the state pension continues to benefit from the triple-lock, which pegs the payment to the highest of average earnings, CPI inflation or 2.5%.
“With average earnings the highest figure this year, pensioners will enjoy a 2.6% increase in their state pension income from April 6th. That will bring the basic-state pension up to £129.20 per week, while the flat-rate state pension – introduced for those retiring from April 2016 onwards – will rise to £168.60.”
Mortgage interest relief cut for landlords
Laura Suter: “April will see the continuation of the tax crackdown on landlords, when the tax breaks available for buy-to-let investors are reduced again. The Government has gradually removed the amount of mortgage interest landlords can use to offset against their profits, and instead buy-to-let investors will get a basic rate tax relief reduction, at 20%.
“From April 2017 the landlords could only offset 75% of their mortgage costs against their profits, dropping to 50% in 2018 and this will ratchet down again to 25% in April. The move only affects higher-rate taxpayers, although it also pushes some people into the higher-rate tax bracket and it has led to many buying up property within a company structure in a bid to reduce their tax bill.”
Student loan threshold increases
Laura Suter: “The amount you can earn before starting to repay your student loan will increase from 6 April. Those who started university in 2012 or after will see the threshold increase from £25,000 to £25,725, the level above which they pay 9% of their earnings. The change will save these graduates just over £65 a year. Meanwhile those who studied before 2012 will see their threshold rise from £18,330 to £18,935, when they also pay 9% of their earnings, with the move saving them £54.”