Tax changes take effect from now; it’s April, a new financial year, it happens every year. The Budget was months ago but its impact is about to hit us all. So, what does it mean to the personal investor, the ordinary person saving for their retirement?
Income Tax Changes
The most notable change for most people will be from income tax changes. Personal allowances have increased by 3% from £11,500 to £11,850. Meanwhile the basic rate band increases by a further 3% from £33,500 to £34,500. The tax rates for 2018/19 remain at 20% on taxable income up to £34,500 (basic rate) and 40% between £34,501 and £150,000. These are broadly inflationary increments, so if your salary is unchanged or has risen by 3% or less, then the tax changes will make you a little better off.
For those that use them, there’s a small increase in married person’s allowances, too.
Dividends and Investments in Business
If you have investments in companies, directly or on the stock exchange, you’ll see significant changes to the amount of tax you pay. This’ll particularly hit small business owners who’ve avoided income tax by paying themselves dividends.
Last year, you could earn up to £5,000 on dividends without paying tax. This has decreased to £2,000 for 2018/19.
Directors of small businesses should discuss these tax changes with their accountants, to ensure their overall tax liability is minimised. The impact does vary according to which tax band you’re in.
For those using share ownership as a form of saving or investment, it may mean they want to consider moving funds into another, more tax-efficient vehicle, such as an ISA. Again, professional advice can help them to decide.
For every £10,000 in dividends earned in a year, a basic-rate taxpayer would see their tax bill rise by £225, while a higher-rate taxpayer would pay a further £975.
Pensions and Auto-enrolment
Employees with auto-enrolment pensions will see a trebling of minimum contributions to 3% of salary, up from 1%. The employer contribution doubles to 2%.
So, the modest increments in personal tax allowances are to some extent being negated by these pension increases, effectively a tax change. Which, after inflation, is going to make many feel poorer.
Major Tax Changes for Buy to Let Investments
Although not ‘news’ to those who know this market, more cuts to mortgage-interest relief apply from the start of 2018/19. These are making buy to let less attractive as an investment strategy.
At the beginning of 2016/17, landlords could offset all mortgage interest payments against rental income. This was cut to 75% in 2017/18 and is now down to 50%. It will be further reduced to 25% next year, and 0% the thereafter. Many private buy-to-let landlords have interest-only mortgages, so these changes will hit their incomes hard.
OK, so it’s been well publicised and is being done gradually, but this tax change, originally from George Osborne, is hurting smaller investors. It’s also putting many off entering the buy to let market.
There’s a risk that this’ll push more landlords into the higher-rate taxpayer category. If buy to let is part of your investment strategy, you would be well-advised to consider the full tax implications of it at the start of the year, rather than when it’s too late.
Saving and ISAs
Firstly, the ISA allowance – the amount you can save tax free – remains unchanged at £20,000. A real-term decrease. The Junior ISA’s allowance has been increased to £4,260.
So, for parents and grandparents looking to create a legacy for their offspring, this is a good opportunity to divert assets.
Overall, the Budget has introduced a series of small allowance improvements negated by larger, adverse tax changes for many. These tax changes are hitting investments and savings as well as income from certain streams. Of course, it all depends on your individual circumstances. So, as ever, seek professional advice unless you’re an expert and take time to consider what you do before acting.
*—Some of the data was taken from an excellent article in the Observer on 8th April, 2018.—*