Your essential guide to 2018 tax allowances
Savings and investments
Personal Savings Allowance
Introduced in April 2016, the Personal Savings Allowance (PSA) reduces the amount of tax people pay on their savings income in banks, building societies, NS&I products, company bonds and credit unions.
Basic rate (20%) taxpayers who earn up to £45,000 (£46,350 in the 2018/19 tax year), can earn up to £1,000 of savings income without any tax being due. Higher rate (40%) taxpayers who earn between £45,001 and £150,000 have a £500 PSA. But additional rate taxpayers (45%) who earn above £150,000 are not eligible for a PSA.
Cash ISAs and Stocks and Shares ISAs
Cash ISAs are available to savers over the age of 16, and in the 2017/18 tax year you can save a maximum of £20,000 with any interest earned being tax-free. The savings threshold remains at £20,000 in the 2018/19 tax-year.
Stocks and Shares ISAs (also known as Equity ISAs) are available to savers over 18. These are investment-based products so are riskier than cash ISAs. You can invest in shares of companies or in funds or investment trusts. Again, for the 2017/18 and 2018/19 tax years, the savings limit is £20,000.
You can have money in both a cash ISA and a Stocks and Shares ISA, as long as the total amount doesn’t exceed £20,000. There’s also a third type of ISA in this section, Innovative Finance ISA.
Help to Buy ISA
Launched in December 2015, the Help to Buy ISA is aimed at first-time buyers looking to get on the property ladder. Savers can deposit a maximum of £1,200 in the first month and £200 a month thereafter up to £12,000. The government adds £1 for each £4 you put in (maximum £3,000), but only at the point at which you purchase the property.
Accounts can be opened until November 2019 but you can add money to existing accounts until November 2029. The funds can be used to buy any home worth under £250,000 or under £450,000 in London. Help to Buy ISA money counts as a cash ISA so you need to remain within the overall £20,000 ISA limit if investing in other ISA products.
This homebuyer-come-pension hybrid savings products was launched in April 2017, although to date only a handful of providers offer the scheme – four offer an investment ISA but there is only one cash LISA provider.
The Lifetime ISA (LISA) allows people aged 18 to 39 take out a longer-term tax-free account to help buy a first property and save for retirement. Savers can put in up to £4,000 each year until the age of 50 and the government adds a 25% bonus to the savings, up to a maximum of £1,000 annually.
This means savers can deposit a total of £128,000 which is matched by a maximum government bonus of £32,000. There’s no maximum monthly contribution; you can save as little or as much as you want each month as long as you don’t exceed the £4,000 a year limit, which forms part of your overall £20,000 ISA limit.
In the 2017/18 tax-year only, special rules apply to savers who have both a Help to Buy ISA and a Lifetime ISA.
An ISA for little people too. Junior ISAs (JISAs) are long-term, tax-free savings accounts for children, replacing the old Child Trust Fund.
Parents and guardians can open a cash or stocks and shares JISA for a child under 16, but anyone can pay money into it as long as the amount doesn’t exceed £4,128 (for the 2017/18 tax year). This figure rises to £4,260 for the 2018/19 tax year.
The child can take control of the account when they’re 16, but can’t withdraw the money until they turn 18.
Annual Allowance and Tapered Annual Allowance
The Annual Allowance is the total amount of money you can pay into your pension pot every year, including contributions from your employer into a defined benefit or defined contribution scheme, tax-free. You get tax relief from the government on pension contributions up to this limit. Any contributions above the threshold are subject to income tax at your marginal rate.
The annual allowance is currently set at £40,000 a year for everyone. However, for additional rate taxpayers earning over £150,000, the government introduced a Tapered Annual Allowance effective from April 2016.
Estimated to affect 130,000 workers, this essentially whittles away the annual limit by £1 for every £2 of ‘adjusted income’ (taxable income including employer pension contributions and contributions made via salary sacrifice, minus certain reliefs) between £150,000 and £210,000. Once adjusted income exceeds £210,000, the annual allowance bottoms out at £10,000.
In the worst case scenario, someone could lose £30,000 of annual allowance, resulting in them having to pay a tax bill of £13,500 (45% tax on an excess contribution of £30,000).
The Lifetime Allowance (LTA) is the maximum amount of pension savings you can build up without a tax charge.
This figure currently stands at £1m, but from April 2018, it will rise to £1,030,000. This is the first rise in the LTA since 2006, based on September 2017’s Consumer Price Index measure of inflation of 3%.
Savers who exceed the allowance are charged either 25% tax on the excess if they withdraw the money as income, or 55% if it is withdrawn as a cash lump sum.
Money Purchase Annual Allowance
Those aged 55+ have a restricted Annual Allowance known as the Money Purchase Annual Allowance (MPAA). In the 2016 Autumn Statement, the Chancellor announced the MPAA would be cut from £10,000 a year to £4,000 from 6 April 2017, affecting around 3% of over 55s.
This move was to prevent the “inappropriate double tax-relief” advantage of people withdrawing money from their pension pot and recycling it back in again, gaining tax-relief a second-time round.
The policy failed to be enforced then due to the General Election but it was applied in July 2017 – and backdated to 6 April 2017.
Since 2010, the State Pension has risen annually by the highest of inflation, earnings growth or 2.5%, under the ‘triple lock’ guarantee.
As the September CPI figure is the largest of the three, the 3% rise applies to both the new flat rate State Pension and the old basic State Pension in April 2018. This means those on the flat rate State Pension will see maximum weekly earnings rise from £159.55 per week to £164.35 per week (£8,546.20 a year). Those on the basic State Pension will get £125.95, up from £122.30 per week. The triple lock is guaranteed until 2020.
Workplace pension contributions
Auto-enrolment was first introduced in 2012, making it compulsory for employers to enrol eligible staff into a pension scheme. It is being phased in over a six-year period and the smallest and newest firms will reach their ‘staging dates’ by February 2018.
To be eligible for auto-enrolment, you need to be aged between 22 and State Pension age, and you need to earn at least £10,000 per year from a single job. This figure has been frozen for the 2018/19 tax year.
Currently both the employee and employer pay 1% each so that’s a total 2% contribution. From April 2018, minimum auto-enrolment contributions rise to a total of 5% , made up of 2% from the employer and 3% from the employee (though the employee pays less as the contribution gains tax-relief). It will increase further from April 2019 to 8% – 3% from the employer and 5% from the employee.
Taxes and earnings
The Personal Allowance is the amount of money you can earn before you start paying income tax. It will rise with inflation from the current £11,500 to £11,850 in April 2018. According to the government, this means a typical taxpayer will pay around £1,075 less than in the 2010/11 tax year.
The government has committed to raising the Personal Allowance to £12,500 by 2020.
For higher rate taxpayers, the income tax threshold will rise from £45,000 to £46,350 in April 2018, though the government has already committed to raising the higher rate threshold to £50,000 by 2020.
Britain’s ‘most hated’ tax saw the government rake in £3.7bn in the eight months to December 2017, up nearly 15% on the previous year. More and more families are being pulled into the inheritance tax net. The current inheritance tax-free allowance for individuals is £325,000, while for married couples/civil partners, it’s £650,000.
The resident nil-rate band allowance of £175,000, which applies to estates including a family home, is being phased in over the next few years. It allows a family home to be passed on to direct descendants free of inheritance tax. For the 2017/18 tax year, there’s an additional allowance of £100,000 per person, rising to £125,000 in 2018/19, £150,000 in 2019/20 and finally £175,000 in 2020/21, meaning couples can effectively pass on as much as £1m IHT free by then.
Capital Gains Tax
Another unpopular money-maker for the government, a record £8.3bn in Capital Gains Tax (CGT) was received by HMRC in 2015/16.
CGT is charged on the profits made when certain assets are sold or transferred. If all gains in a tax year fall within the annual CGT allowance (£11,300 for 2017/18, £11,700 for 2018/19) there is no tax to pay.
When gains are realised (funds, shares outside of an ISA or SIPP), CGT will be charged at either 10% (basic rate taxpayer) or 20% (higher and additional rate taxpayer) depending on an investor’s other taxable income.
If the combined taxable income and gains don’t exceed £45,000 (2017/18 tax year, £46,350 for the 2018/19 tax year), 10% CGT on gains above the annual allowance is paid. Where gains and taxable income exceed £45,000, 20% CGT is paid.
If gains fall into two bands, taking the investor from the basic rate into the higher rate, CGT is paid at 10% on the amount which falls in the basic rate band and at 20% on the amount which falls in the higher rate band.
For a buy-to-let or investment property, the tax is different:
- Higher and additional rate taxpayer – 28%
- Basic rate taxpayer – 18%
The tax-free Dividend Allowance will be cut from £5,000 to £2,000 in the new 2018/19 tax year.
The measure will affect employees and directors of small businesses who might remunerate themselves partly or wholly through dividends rather than salary.
It could also hurt investors with dividend generating shares and funds held outside of ISAs and pensions.
The government estimates around 2.27 million individuals will be affected with an average loss of £315.
Any dividend income above the current £5,000 allowance is taxed at the following rates:
- Basic rate taxpayer – 7.5%
- Higher rate taxpayer – 32.5%
- Additional rate taxpayers and trustees – 38.1%.
Around four million couples are eligible for the Marriage Allowance allowing a civil partner or spouse to transfer 10% of their Personal Allowance to their partner. This boosts the receiving partner’s Personal Allowance, meaning they can earn more before they start to pay tax.
As the Personal Allowance will rise to £11,850 in the 2018/19 tax year, this means £1,185 can be transferred to the lower-earning partner, resulting in a £237 tax break.
However, the Marriage Allowance can be backdated up to four tax years, so eligible couples can also make the following claims:
- 2017/18 tax year: the personal allowance is £11,500 so £1,150 can be transferred, resulting in a £230 tax break.
- 2016/17 tax year: the personal allowance was £11,000 so £1,100 can be transferred, resulting in a £220 tax break.
- 2015/16 tax year: the personal allowance was £10,600 so £1,060 can be transferred, resulting in a £212 tax break.
If you were eligible for all the four tax years, you will be able to claim a total £899 tax break.
Further, the Marriage Allowance has also recently been extended, allowing surviving spouses to claim the tax break on behalf of their deceased partner.
Stamp Duty was cut on 22 November 2017 for first-time buyers. It means there’s no Stamp Duty to pay for first-time buyers of property worth up to £300,000 and it will also apply to the first £300,000 for properties worth up to £500,000.
It is expected to help more than a million first-time buyers get onto the housing ladder in the next five years. Essentially, the measure will cut tax for 95% of all first-time buyers while 80% are expected to be lifted out of paying the tax at all.
Here are the current Stamp Duty rates:
- 0% on property purchase of £0 – £125,000 (3% for the surcharge)
- 2% on property purchase of £125,001 – £250,000 (5% for the surcharge)
- 5% on property purchase of £250,001 – £925,000 (8% for the surcharge)
- 10% on property purchase of £925,001 – £1.5m (13% for the surcharge).
National Insurance Contributions
There are usually two types of National Insurance Contributions (NICs) for the self-employed. Currently Class 2 NICs of £2.85 per week are payable for those whose profits are £6,025 or more a year, while Class 4 payments are paid by those whose profits are £8,164 or more a year (9% on profits up to £45,000 followed by an extra 2% on profits over £45,000).
The Chancellor of the Exchequer first announced in the Spring Budget 2017 that Class 2 NIC payments would be abolished in April 2018 while Class 4 payments would rise from 9% to 10%.
However, in November last year, the Treasury confirmed Class 2 payments would remain until 2019.
Consumers pay VAT on a number of goods and services. If you’re self-employed or have a UK business with a turnover above the current £85,000 VAT threshold, you need to register with HMRC. The 20% VAT charges need to be passed over to the tax authority. In the 2017 Budget, the Chancellor confirmed the VAT threshold would remain at £85,000 in the new tax year. The UK has the highest VAT threshold in the EU, where the average is £20,000.