Now that we have entered the 2018/19 tax year, this brings about a refresh of your tax-year specific allowances. We wanted to provide a short summary of the new allowances available, many of which provide valuable investment opportunities.
Personal Allowance – £11,850
The personal allowance has increased by £350 to £11,850, with income within this not being subject to income tax. As a brief reminder, the personal allowance is available for all individuals, however is reduced by £1 for every £2 of income above £100,000 (completely lost at £123,700). Marginal rates of income tax remain unchanged at 20%, 40% and 45% for income received in excess of the personal allowance.
Capital Gains Tax (CGT) Allowance – £11,700
The CGT allowance has increased by £400 to £11,700, with any realised gains up to this level not being liable to CGT. For Trusts, the allowance remains at half of the level available for individuals (£5,850). Any gains realised above the allowance will continue to be taxed at 10% or 20% depending on your marginal rate of tax (higher rates for residential property gains).
Dividend Allowance – £2,000
The dividend allowance has reduced from £5,000 (2017/18) to £2,000, with any dividends in excess of this allowance being tax at marginal dividend rates (7.5%, 32.5%, 38.1%). It is important to remember here that the dividend allowance essentially utilises £2,000 of your basic-rate band and should your income level already be fully utilising your basic rate tax band, this would push £2,000 of taxable income into the higher-rate tax band (40% tax rather than 20%).
It is important that portfolios are structured in the most tax-efficient way to utilise these three allowances. For example, considering the transfer of dividend producing assets to a spouse that pays a lower marginal rate of tax or managing the taxable gains within a portfolio on an ongoing basis.
Cash ISAs/Stocks & Shares ISAs – £20,000
Junior ISAs (JISA) – £4,260
Lifetime ISAs (LISA) – £4,000
The cash/stocks & shares ISA allowance is remaining unchanged at £20,000, and during the course of the year the allowance can be split between the two types of plan. For those wishing to maximise the allowance using monthly investments, these would need to be at a level of £1,666.66 pm. ISAs remain one of the most tax-efficient wrappers, being free from all forms of personal taxation (income tax, CGT, dividend tax) and should be the first point of call to accumulate capital on an annual basis.
The Junior ISA limit is increasing from £4,128 (2017/18) to £4,260, meaning that a further £132 can be invested for children. JISAs remain a tax-efficient way for parents/grandparents/family members to save for children throughout their minor years, with no access to the capital until the age of 18 when the plan would convert to a stocks & shares ISA (although control of the plan is given at 16).
For those looking to invest into LISAs, the allowance is remaining unchanged at £4,000. These products are aimed primarily at those looking to buy their first house, or those looking to save for retirement (post 60), for which 25% bonuses from HMRC can be earned. For any other withdrawals, investors are charged a 25% penalty which effectively removes this bonus.
Pensions – £40,000 gross
For the new tax year, the pension annual allowance is remaining unchanged at the lower of £40,000 (£32,000 net) or the level of earned income. For those with no earned income (including children), the maximum annual contribution remains at £3,600 gross (£2,880 net). For those with total income in excess of £150,000, the annual allowance is tapered down at a level of £1 for every £2 of income, to a minimum level of £10,000, with this being the third year of the tapering system. This tapering is a complex topic, and we will be looking to produce a blog in the coming months which focuses on this in more detail.
Pensions remain a very attractive option for investors, with tax relief being able to be achieved at your highest marginal rate on any personal contributions, and companies being able to classify employer contributions as business expenses. In addition, under current legislation most pensions are not included as part of your estate when being assessed for Inheritance Tax (IHT).
The aim of this blog is to highlight the allowances available to individuals now that we have entered the 2018/19 tax year. If you have any questions at all then you should contact your adviser.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Tax Advice.