As the end of the tax year approaches let’s look at some of the nice round numbers that the taxman has kindly given us from April 2019.
These should all form part of your strategy going forward to ensure you are not missing out on vital allowances or slipping into higher tax brackets without realising. So look at the numbers closely and apply them to your circumstances to check if you are impacted for better or for worse.
- £12,500 – Personal allowance, tax free allowance for everyone*
Should be good news all round, certainly if you are retired. That’s an increase of £650 on last year and this figure will stay the same in 2020/21, which is useful for planning and will then increase in line with the consumer price index (CPI) from 2021/22 onwards.
*reduced by £1 for every £2 of threshold income over £100,000
- £37,500 – 20% tax bracket.
You will pay 20% tax on income up to this level. When added to figure 1, this means your first £50,000 is either tax free or taxed at 20%. You could increase your basic rate income from employment or pension drawdown and stay within the basic tax bracket. This is an additional £3,650 pa compared to 2018/19.
Combine the top two figures and if your total income is below £50,000 you will be a basic rate tax payer. If you creep over this figure you go into the 40% tax bracket and this can impact on people who might otherwise qualify for child benefit.
- £2,000 dividend allowance
No changes here but still an important allowance if you are an owner of your own business or have an investment that is not held within tax efficient ISAs or Pension wrappers.
- £100,000 – the level at which you will start to lose your personal allowance
If you earn over £100,000 you could well benefit from advice related to making pension contributions before the end of the tax year and in the next year. These contributions will potentially bring your Threshold income below £100,000 and reduce the level of tax you pay.
In 2019/20, once you are earning over £125,000 you will have a completely lost your personal allowance. However, you could potentially make pension contributions either personally or through salary/bonus sacrifice to recover your personal allowance. As I have written about previously, contributions via bonus sacrifice can increase your benefit by National Insurance savings as well. This this is a vital part of planning to consider before the end of the tax year and going into 2019/20.
- £150,000 – Adjusted income
Once your adjusted income is over £150,000 you will start to lose your annual allowance for pension contributions. Again, you lose £1 for every £2 that your income is over £150,000. Once your adjusted income reaches £210,000 you will be left with an annual allowance of just £10,000 and it will not drop below this.
- £12,000 – CGT allowance
This is your capital gains tax allowance for next year. One of the most underused tax allowances we have and very useful if you are sitting on shares or funds you have held for a long time and not manged to migrate into tax efficient wrappers like ISAs and Pensions.
- £150,000 – Residence nil rate band for 2019/20.
When speaking to clients there is still a lack of understanding around this allowance. It could potentially mean that a joint estate, which includes a main residence and two individual nil rate bands of £325,000 per person, has a total inheritance tax threshold of £950,000 next year. This limit would be tax free from inheritance tax as long as conditions are met. Importantly though, if you have an estate over £2,000,000 this allowance is reduced.
Having simple round numbers from the taxman allows you to make straightforward planning decisions going into the next tax year. If your total income is just over £50,000 or £100,000 there are some important decisions that you should make to avoid falling into excessive tax brackets. If you would like to learn more about Threshold income or Adjusted income and your opportunities in this area, then feel free to make contact.
If you are in retirement and hold any investments, the increased personal allowance and basic tax band, offer important opportunities related to where you should withdraw your income and at what level each year.
If you wish to discuss any of the taxman’s upcoming changes and their impact on your personal financial plan, as well as the services offered by Wingate Financial Planning, please do not hesitate to contact me directly.