Happy New Tax Year!Apr 9th, 2017
The new tax year is not generally seen as a time for popping the champagne and welcoming in the dawn of a new financial year. However, we have provided a brief overview of some of the main reasons why this new tax year could provide some welcome 'resvolutions'.
The increase in the personal allowance to £11,500 is a step towards the government’s pledge, in 2016, to increase the personal allowance to £12,500 by 2020. In addition the basic rate tax band will be increased to £33,500 and the higher rate threshold will be increased to £45,000. These measures will serve to reduce income tax liabilities and increase household’s disposable income. The increase in the personal allowance applies to all individuals with adjusted net income under £100,000, the personal allowance is reduced by £1 for every £2 of taxable income over £100,000.
Gross income can be reduced by making personal pension contributions or gifts to registered charities. The gross contribution is deducted from total income to calculate adjusted net income.
The ISA allowance increased significantly in July 2014 from £11,880 to £15,000, and to the current level of £15,240 in April 2015. The new tax year sees another significant increase from £15,240 to £20,000. This is a welcome boost for savers and investors seeking to shelter their assets from income tax and capital gains tax.
Large sums of capital can be accumulated within an ISA wrapper over a relatively short period of time. The compounding effect of holding investments within an ISA wrapper is much greater than a non-ISA investment as no tax is paid on income or gains. ISA wrappers provide meaningful tax savings to investors, especially those paying higher or additional rates, and these savings will only increase over time as further contributions are added and investments are left to grow.
The flexibility and function of an ISA wrapper has evolved immensely since its introduction in April 1999. The ISA boutique includes the Cash ISA, Stock & Shares ISA, Help to Buy ISA, Innovative Finance ISA and the Junior ISA. April 2017 will see yet another ISA revolution in the form of the ‘Lifetime ISA’. The Lifetime ISA is available to individuals under the age of 40 who are prepared to lock away their savings for a period of time in exchange for a 25% uplift on their contributions, plus tax free investment growth. Please click here for an overview of the different types of ISA available.
Since 3rd December 2014 it has been possible for bereaved spouses and civil partners to claim an extra ISA allowance up to the value of their deceased partners ISA as at date of death. The time frame to claim this extra allowance is three years from the date of death, or 180 days after the administration of the estate is complete, if later.
Finally, the number of UK families paying inheritance tax has increased significantly over recent years, largely due to the staggering increase in property prices experienced since the mid-90’s. In an attempt to ‘soften the blow’, the new Inheritance Tax Residence Nil Rate Band (RNRB) will be introduced on 6th April 2017. The RNRB will be in addition to the current nil rate band which is set to remain at £325,000 until 2020/21.
The RNRB will start at £100,000 and will increase by £25,000 each tax year until the rate has reached £175,000 in 2020. Therefore, the maximum tax saving for an individual will range from £40,000 in April 2017, up to £70,000 in April 2020, these savings could be further increased in circumstances where the RNRB has not been used by a spouse or civil partner, and in this instance the personal representatives of the surviving spouse can claim any unused RNRB.
There is a small cloud to this silver lining, the RNRB will be reduced by £1 for every £2 that the deceased net estate exceeds £2M.