The end of the tax year presents a valuable window of opportunity for advisers to review their clients’ investment portfolios and make the most of the allowances, reliefs and exemptions available to them. Equally, the start of the new tax year provides a renewed opportunity to think ahead and help your clients build a sustainable, tax-efficient portfolio across the year rather than waiting until the last minute and risk missing deadlines before 5 April.
While planning for the tax year 2019-20, there are a number of changes that you need to be aware of which take effect on 6 April. As tax year changes go, the start of this new year could be called a quiet one, but that doesn’t mean there’s nothing new. Here are five changes in the new tax year you should be aware of when helping your clients get the 2019-20 tax year off to a flying start:
1. Changes in the personal allowance and tax thresholds
The personal allowance increases to £12,500 (from £11,850) giving most people a small reduction of £130 in tax. As the personal allowance is reduced by £1 for every £2 earned above £100,000, the personal allowance will be reduced to zero for anyone earning above £125,000. Those with incomes marginally above this level can reduce adjusted net income and restore all or part of their personal allowance by making pension contributions or charitable donations via gift aid. Donations made under gift aid may also be carried back to the previous year.
Income tax thresholds in England, Wales and Northern Ireland increase; the threshold for paying higher rate of income tax increases to £50,000 (from £46,360).
In Scotland, however, the higher and top tax thresholds have been frozen for non-saving and non-dividend income, meaning those people earning between £43,430 and £50,000 will pay more income tax and national insurance contributions (NICs) in Scotland than the rest of the UK (rUK). This may influence their savings and investment decisions. For example, they may choose to take tax-free withdrawals or withdrawals taxed as savings income (at rUK income tax rates) ahead of pension withdrawals which are taxed at a higher rate as earned income.
2. The pension lifetime allowance goes up to £1.055m
The pension lifetime allowance increases on 6 April from £1.03m to £1.055m. Although this sounds like only a small increase, it could have a big effect for those who want to crystallise their pension benefits and are close to using up 100% of their lifetime allowance. By taking pension benefits in the new tax year they are using up a lower percentage of their lifetime allowance, meaning less chance of paying a lifetime allowance charge.
Example – Tommy
Tommy has a Sipp fund worth £1.2m, and no lifetime allowance protection.
If he enters drawdown on 1 March 2019, he will pay a lifetime allowance charge of 55% of £170,000 = £93,500.
If he delays taking benefits until after 6 April 2019, he will pay a lower lifetime allowance charge of 55% of £145,000 = £79,750 – a saving of £13,750 lifetime allowance charge.
You can read more about the pensions lifetime allowance and limits across the 2018-19 and 2019-20 tax years here.
3. The Jisa subscription limit increases to £4,368
The adult Isa subscription levels will be frozen at £20,000 for the second year in a row. A couple maximising their respective Isa subscription limits can therefore invest up to £40,000. However, the Junior Isa (Jisa) limit will increase from £4,260 to £4,368. Anybody can gift money directly into a child’s Jisa. Where the parents pay money into a Jisa the income that payment generates is exempt from being taxed on the parents under the parental settlement rules. When a child reaches age 16, they can apply for an adult cash Isa as well and subscribe an overall total of £24,368 in 2019-20.
To find out more about Isa and Jisa subscription limits across the 2018-19 and 2019-20 tax years, check out our Jisa factsheet.
4. Changes to capital gains annual exempt amount
The capital gains annual exempt amount will increase to £12,000 (from £11,700). It’s important to use up the allowance if possible, as it cannot be carried forward to a future tax year. Married couples and civil partners may also want to consider transferring assets between them, so they can make best use of both annual exempt amounts.
5. Residence nil rate band rises to £150,000
Although the inheritance tax (IHT) nil rate band remains frozen at £325,000, the additional residence nil rate band will increase to £150,000 and will further increase to £175,000 from April 2020. Subject to various conditions, some taxpayers are entitled to this additional nil rate band if their main residence is passed to direct descendants. For some spouses and civil partners, this means from next tax year that careful tax planning could result in up to £1m of their estates being free of IHT.
Every tax year brings a few changes and 2019-20 is no different. The new tax year presents an excellent opportunity to think ahead and get the 2019-20 tax year off to a flying start for your clients.