As the tax-year end looms, AJ Bell Personal Finance Analyst Laura Suter looks at the changes that April 6 will bring for personal finances.
Junior ISA allowance jumps
Parents will see a massive jump in the amount they can put away in a Junior ISA, with the annual limit more than doubling from the current £4,368 to £9,000. The increase in allowance means a parent starting saving next month for a newborn child could build a tax-free pot of more than £240,000 by the time their child reaches 18, assuming they put the maximum £9,000 in each year and it grows by 4% every year after charges.
In reality, few families will be able to afford the £750 monthly contribution that’s required to hit this limit, particularly if you consider that the current average contribution amount is just under £1,000 a year.
Capital Gains Tax Allowance increases
The amount investors can make each year in capital gains before they pay tax will increase from the current £12,000 to £12,300. The move will save basic-rate taxpayers £30 a year, on non-property assets, and higher and additional-rate taxpayers with gains above the limit £60 a year.
It will represent a slightly bigger saving for property assets that attract a higher rate of CGT, with savings of £54 for basic-rate tax payers, and £84 for higher and additional-rate payers respectively, but it’s hardly likely to set anyone’s world on fire.
Less National Insurance to be paid
The changes to the point at which you start paying National Insurance will kick in from next month, giving average workers a £104 a year saving. The move, announced in the Budget, means that the threshold at which you pay National Insurance will rise from the current £8,632 to £9,500 – a move around 31 million people are to benefit from.
Those with income between £150,000 and £300,000 will see the amount they can save in a pension each year increase next month. This is because the Government has made changes to how the annual allowance taper works, which is when the usual £40,000 annual limit on how much you can save in your pension starts to reduce.
At the moment, the pension tax taper kicks in when someone’s ‘threshold’ income is above £110,000 and ‘adjusted’ income is above £150,000. Threshold income is broadly taxable earnings minus personal pension contributions, while adjusted income is taxable earnings plus employer contributions. Where both limits are breached, the annual allowance reduces by £1 for every £2 of adjusted income earned above £150,000, down to a minimum of £10,000.
However, the government has now raised the earnings thresholds by £90,000 apiece, meaning the income limits before the pension taper kicks in have risen to £200,000 and £240,000. At the same time the Government is reducing the lowest annual allowance from the current £10,000 to £4,000, which will affect those with incomes above £300,000.
In a much simpler move, the Government has also increased the amount you can save into a pension over your lifetime from the current £1,055,000 to £1,073,100, a £18,100 boost.
State pension increases
The State Pension will also increase from next month, thanks to the triple-lock, which means it rises each year with the higher of either average earnings, the rate of inflation or 2.5%. This year earnings was the highest of these three, meaning that retirees will enjoy almost a 4% increase to their pension.
Those on the old state pension will see the weekly amount rise from £129.20 to £134.25 – a £5.05 increase, while those on the new state pension will see their income rise from £168.80 to £175.20 – a £6.60 jump.
Inheritance tax breaks get more generous
Next month inheritance tax benefits improve again, and everyone will be able to leave more money as part of their estate before they have to pay inheritance tax. The limit of how much you can leave before your estate pays the 40% tax has been increasing gradually since a new allowance was first introduced in April 2017, meaning anyone with residential property was given an extra inheritance-tax-free allowance. It will go up one final time in April to £175,000 per person, on top of the existing £325,000 nil-rate band.
This means that including the standard nil rate band, from April a couple can leave a property worth £1m entirely inheritance tax free. As with all these things there are some tricky rules you have to stick to, so the property must be left to a child, grandchild, or step versions, and those with lots of money and assets won’t get the full amount, as anyone with an estate valued at more than £2m will lose the allowance by £1 for every £2 they are over this limit.
Landlord tax breaks finally axed…
Landlords will see another hike in taxes from April, as the cuts to the tax breaks they’ve seen over the past four years continue for one final time. The changes are because the Government has been gradually reducing the amount of mortgage interest landlords can use to offset against their income when they are calculating their profits.
The relief was cut last year so that only 25% of landlords’ mortgage costs could be set against profits, but that falls again in April so that none of the costs can be offset. Instead buy-to-let investors will get a basic rate tax relief reduction, at 20%.
The move only affects higher or additional-rate taxpayers, although the move itself will push some landlords from the basic-rate tax bracket into the higher-rate bracket. As an example, a higher-rate taxpayer landlord who gets £1,000 a month in rent and has mortgage costs of £600 a month would have paid £1,920 in tax before the changes began pre-2017, but will pay £3,360 in tax from April.
…while second homeowners face higher taxes too
Anyone who has rented out their home after moving out, rather than selling it immediately, will face a higher tax hit from April. The Government has made three big changes to how the tax works when you come to sell this property.
Firstly, many sellers will lose the ‘lettings relief’ tax break, affecting how much capital gains tax you pay when you sell the property. Currently you get capital gains tax relief up to £40,000 per person (so £80,000 per couple) if you let out a property that was your main home, but from next year this relief will only apply to landlords who are actually living in the property with their tenants and letting out a room.
The next big change is to private residence relief, which currently means that any increase in the property’s value during the final 18 months that you own a property is not counted for capital gains tax purposes. However, from April that will be limited to nine months.
The third change is that you will have to pay any capital gains tax you owe much more rapidly. At the moment you just have to pay this bill by the end of the January in the following tax year, but from April you have just 30 days to pay the tax due on any gains from the sale of UK residential property. There’s little property owners can do about all of these changes, other than be aware of them.
Student loan repayments fall
Graduates will get a small boost in their take-home pay from April, as the amount you can earn before starting to repay your student loan will increase from £25,725 to £26,575. It means if you earn less than £26,575 you won’t pay anything back.
Those over this limit repay the loan at a rate of 9% above this figure, so the hike will mean graduates earning above the threshold will get an extra £76.50 in their back pocket. Meanwhile those on a Plan 1 loan – so who went to university between 1998 and 2011 - will see their threshold rise from £18,935 a year to £19,390.
Overdraft fees will be easier to understand, and maybe cut
The new rules on how banks charge for overdrafts officially come into place in April, but in reality many banks are bringing in their new charging structures before then with lots coalescing around charging 40% for overdrafts.
The FCA’s rules aimed to simplify the overdraft market meaning banks won’t be able to charge more for unauthorised overdrafts than for arranged ones, and they must advertise clear percentage fees, not an array of charges. In reality though, many people in arranged overdrafts will see their costs double when the new charges come in as rates are hiked.
Considering as a nation we are collectively £6.7bn* into our overdrafts, this could represent a massive cost to households. Many borrowers will have been working to reduce their overdrafts ahead of the new rates coming in, while others will have shifted the debt to cheaper forms of borrowing. But for those with a poor credit rating accessing cheap debt isn’t so easy, and they could face a big hit to their finances.
* Source: UK Finance Household Spending figures, December 2019: https://www.ukfinance.org.uk/data-and-research/data/household-finance/household-lending-and-deposits
These articles are for information purposes only and are not a personal recommendation or advice.
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