21st March 2017
The last two years have brought about a plethora of change for investors. As another tax year fast approaches Hargreaves Lansdown highlights eight changes you should be aware of when it comes to saving tax in 2017/2018.
Since April 2016 interest from bank and savings accounts has been paid gross as part of the introduction of the Personal Savings Allowance (PSA – £1,000 for basic rate taxpayers, £500 for higher rate taxpayers). This change is being extended in April to include any interest payments received from corporate bond or gilt funds. This will happen automatically and investors should declare any income received over and above their PSA on their annual tax return or shelter these holdings in ISA or SIPP to avoid tax.
The personal allowance is increasing from £11,000 to £11,500. This means an additional £100 in your pocket each year if you are a basic rate taxpayer.
Unless you are a Scottish taxpayer the basic rate tax threshold is increasing from £32,000 to £33,500. This means that you have to be earning over £45,000 per year (£43,000 in Scotland) in total before you pay any tax at 40% on your earned income, a potential £300 additional saving in tax for anyone earning over these thresholds.
The Lifetime ISA is available to those aged between 18 and 40 and has been designed to suit anyone who is looking to save either for their first home or for their retirement, or both. You can save up to £4,000 per year in cash, or invest it over the longer term into stock market if you prefer, and receive a 25% bonus from the government. Contributions and bonus payments can continue until you reach age 50. All the money saved plus the bonus will grow tax-free.
Your money may be withdrawn penalty free to purchase your first home costing up to £450,000, or withdrawn after age 60 to use in retirement.
The ISA subscription amount is increasing from £15,240 to £20,000.
The increase in the ISA allowance will undoubtedly add to the growing number of ‘ISA millionaires’ in the UK.
As an example: If you were to invest £20,000 per year and your investments grow by 5% consistently every year, you would accumulate over £1 million in 28 years’ time. You could take all of this money out in a lump sum or draw a regular income from it completely tax free.
Junior ISAs are a great way to save tax efficiently for younger members of the family and from April you will be able to save or invest £4,128 into a Junior ISA, an increase from the current £4,080.
From April, those who leave the family home to a direct descendant (such a child or a grandchild) will have up to an additional £100,000 added to their Nil Rate Band. This is doubled up for married couples/civil partners up to £200,000. This additional allowance will increase to £175,000 per person over the next 4 years and could result in an immediate tax saving of up to £80,000 without the need to consider any complex estate planning arrangements.
Under current rules anyone who has taken out a loan such as mortgage to purchase a buy to let property can deduct all of the interest paid on the loan from rental income in order to reduce their income tax liability. From April tax relief on property loans for residential property will be restricted for higher rate tax payers, increasing the amount of tax paid on rental income. The deduction of finance costs such as mortgage interest, are gradually being withdrawn and by 2020 will be replaced with a basic rate relief tax reduction alone.
If you have accessed a pension fund flexibly such as taking an Uncrystallised Funds Pension Lump Sum (UFPLS) or a taxable payment from a Flexi-Access Drawdown arrangement, the amount you can pay into money purchase pension arrangements is being reduced from £10,000 to £4,000. This is called the Money Purchase Annual Allowance (MPAA).
This is particularly detrimental if you are still working and wish to continue saving for your retirement after the age of 55. Accessing your pension funds under the new flexibilities could result in a 90% reduction in your ability to continue saving tax efficiently into pensions.
From April the Scottish Parliament will receive a package of new powers including the power to set the rates and bands of income tax on non-savings and non-dividend income. The Scottish Government is proposing to freeze the higher and additional rates at 40% and 45% respectively and maintain the higher rate of income tax threshold at £43,000 in 2017/18, £2,000 less than the £45,000 new threshold that will apply elsewhere in the UK and make pension contributions to reduce tax for those earning close to the thresholds even more important.