Personal Tax update for the 2017/2018 tax year

January 25th 2017

Personal tax update. Compared to George Osborne’s statements and budgets in 2015 the new Chancellor had few surprises in last year’s Autumn Statement for investors and savers. The most noteworthy changes are to Income Tax thresholds, a new enhanced Residence Nil Band tax rate and new Lifetime ISAs, all of which come into effect in the tax year starting on 6th April 2017.

Income Tax 

The Personal Allowance (the level at which people can earn before paying the 20% basic rate of tax) will increase from £11,000 to £11,500.  The threshold at which higher rate tax (40%) is payable will increase to £45,000. These thresholds are due to increase further over the next few years to £12,500 and £50,000 respectively.

In Scotland, Income Tax was officially devolved to Holyrood on 30 November 2016 and the Scottish Executive’s draft budget has proposed a higher rate threshold set lower than in the rest of the UK, at £43,430, potentially making Scotland the highest taxed part of the country for higher earners.

 

Capital Gains Tax

There is no change to CGT rates, announced in 2015 and effective from 6th April 2016; namely the reduction to 10% for basic rate tax payers and 20% for higher rate tax payers with sellers of residential investment property continuing to pay an additional 8% surcharge.

Residence Nil Rate Band

This is an additional Nil Rate Inheritance Tax band which applies when a main residence is passed to a direct descendant. The Residence Nil Rate Band (RNRB) is being phased in from April and it represents one of the more significant changes effective in 2017.

The new band can be inherited by a surviving spouse or civil partner and is in addition to the £325,000 existing NRB.  This means that from 2020 it could be possible for a couple to leave up to £1 million of assets to their children without paying Inheritance Tax.

 

Tax Year    Standard NRB Residence Nil Rate Band    Total NRB
2017/18   £325,000 £100,000   £425,000
2018/19   £325,000 £125,000   £450,000
2019/20   £325,000 £150,000   £475,000
2020/21   £325,000 £175,000   £500,000

 

Lifetime ISAs

From April 2017 anyone between the age of 18 and 40 can open a Lifetime ISA account and save up to £4,000 a year until their 50th birthday. A 25% bonus will be added by the Government each year on contributions made and the money can be withdrawn at any time to buy a first home, or tax-free at 60 to help towards retirement. This is potentially a useful savings tool for younger people. The key elements of the scheme are:

  • The bonus is paid annually in the 2017/18 tax year, then monthly from April 2018. Once in an individual’s account it is treated as their money; they will be paid interest on it.
  • The bonus is paid on contributions irrespective of whether the investment itself grows or not.
  • The maximum bonus possible is £32,000 (unless the rules change); to do that the Lifetime ISA needs to be opened at age 18 with annual contributions at the maximum level of £4,000 each year until the age of 50.

Life and investment companies are still designing the requisite systems to handle this entirely new product, so it might be a few months into the Summer before they become widely available.

Pensions

Little has changed except the Money Purchase Annual Allowance will reduce from £10,000 to £4,000.  This means that most people who have already accessed their pensions will only get income tax relief on up to £4,000 of any new pension savings they make from April 2017.  The intention behind this is to stop people recycling money through their pensions in order to benefit from tax relief.

The article is for personal tax update information purposes and does not constitute any form of financial advice.

Hugo Cannon 3

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