Tax tweaks Will you end this week richer or poorer?
Sam Brodbeck counts the ways you could be affected by the most significant changes coming into effect from Friday
Will you wake up richer or poorer on Friday? Each year, dozens of tax changes come into force on April 6. Most will go unnoticed to all but accountants, but a few will have a major and immediate impact on the personal finances of millions of people.
Telegraph Money has identified the most significant winners and losers from the latest round of tax changes. Our grid (right) shows you at-a-glance who emerges richer or poorer. Many people will fall into both camps.
Below we describe in detail how to make the most of any new perks – and how to avoid or mitigate any of the damaging changes.
Pension limits raised
Pensioners relying on company schemes for income have taken a kicking over the past few decades.
The overall amount you can save into a pension has been falling steadily since 2010-11 when the “lifetime allowance” was at a high of £1.8m.
Two years ago, the limit was cut to £1m. Now, for the first time in seven years, the limit will increase by about £30,000, to £1.03m.
Pensions are “tested” against the lifetime allowance at various points, including when a first withdrawal is made and at age 75, and savers face tax charges on any excess. The charges wipe out the tax relief that applies to all pension contributions.
This week’s increase means people approaching the limit can continue to save for longer.
In February, the Telegraph reported that the lowering of the pension cap had contributed to a rise in the number of GPS retiring early because there was less financial benefit in continuing to work.
The state pension is also set to rise because of the increasing cost of living. As inflation is running above earnings and 2.5pc, payments will rise 3pc because of the “triple lock” rule. This will add £4.78 a week to the full state pension, which is currently £159.55 per week.
This system applies to everyone who reached the state pension age after April 2016. The basic pension, which is paid to people who retired before that date, will also increase by 3pc, to £126 a week.
Death duty changes
A rise in a special inheritance tax allowance will enable thousands of families to pass on more to their children and grandchildren tax free.
Last April the “residence nil-rate band” took effect, giving individuals an extra £100,000 free from death duties where a family home was inherited by the next generation.
This April, the new allowance rises again, to £125,000 per person.
Combined with the existing nil-rate band, that means an individual can pass on £450,000 without paying inheritance tax. A couple can pass on £900,000, as widows inherit their spouse’s unused allowance on their death.
However, a quirk in the rules means the family home allowance is only applicable when property is passed to “direct descendants”. Any wills constructed to place property into a trust (a common plan in the past) should be rewritten to take advantage.
Note too that the allowance tapers for estates worth more than £2m.
More tax-free income
The personal allowance, or the amount that you can earn tax-free, rises to £11,850 from £11,500. And the starting point for 40p tax is to increase to £46,350, from £45,000.
The Conservatives plan to raise these thresholds to £12,000 and £50,000 by 2020.
Dividend allowance cuts
Chancellor Philip Hammond’s crackdown on how business owners pay themselves will also hit hundreds of thousands of ordinary investors. Just two years after its introduction, the dividend allowance will fall from £5,000 to £2,000 for the 2018-19 tax year. Bosses who pay themselves through dividends will suffer, as will ordinary investors.
Investments held inside Isa and pension wrappers are safe but high-yielding stocks – such as ITV (pictured left), M&S, BT or Vodafone – in other accounts are under threat.
There is still time to move up to £20,000 into Isas before the end of the tax year, while another £20,000 can be moved on April 6. However, investors will have to sell and re-purchase assets inside the Isa, potentially incurring capital gains tax.
Louise Morris, of AV Trinity, the financial advice firm, said: “The introduction of the allowance was great, but reducing it to just £2,000 starts to affect people who have never had to fill out a tax return.”
A basic-rate payer with £5,000 of dividend income will pay an extra £225 as a result of the changes. A higher-rate payer will pay £975 more and a top-rate payer £1,143.
Mortgage relief lowered
The crackdown on buy-to-let investors continues with the next stage of the gradual removal of mortgage interest relief. In 2018-19 only 50pc of mortgage interest payments will be deductible as a business expense.
By 2020 the option will be removed entirely and replaced with a 20pc tax credit, leaving basic-rate taxpayers largely unaffected.
Bringing your income below the higher-rate threshold, such as by making extra pension contributions, could drastically lessen the impact.
Married landlords could also consider transferring the majority of the mortgage payments to a basic-rate-paying spouse.
Council tax rises
Householders in England face the steepest rise in council tax for 14 years, as authorities prepare to use new powers to raise bills.
In 2017 the Government announced an increase in the amount councils can raise tax without triggering a local vote, and last week confirmed that the average council tax bill in England will rise by 5.1pc.
There is little homeowners can do, apart from claiming their property is in the wrong band. However, be warned that this can work against you – the Valuation Office Agency may decide your home should be in a higher-value band and increase your bill.