At the start of the new fiscal year, the increases and reductions spelled out in the Autumn Budget come into force. There are savings to be made on income tax, but cuts to dividend income, changes to inheritance tax and marriage allowance. Whether you’re a basic-rate taxpayer or in a higher income bracket, here’s everything you need to know – including an update on complex new variations in income tax in Scotland.
This month the income at which tax becomes due is rising to £11,850 – up from £11,500 in 2017/18. That will save basic-rate taxpayers £70 a year. If your income is less than that then no tax is due. Taxable income includes earnings, self-employed profits, pensions and rental income. Savings interest and dividends are also included, but special rules apply to them, which are explained below. There is better news for those on higher incomes. The threshold where the higher-rate tax of 40% begins is now £46,350 – up from £45,000 last year – meaning they will pay £340 less income tax. Different rates and thresholds apply in Scotland – see the table below.
The marriage allowance for married couples or civil partners is now £1,190. A non-taxpaying partner can transfer that to the other if they do not pay higher-rate tax; it is worth £238 off their tax bill throughout the UK. You can backdate a claim to tax year 2015/16. If either spouse was born before 6 April 1935 they should claim married couple’s allowance instead, which is worth £869.50 off one partner’s tax in 2018/19.
If you work and earn more than £162 a week (£8,424 a year), then you may also have to pay national insurance contributions. Once you reach state pension age (currently 65 for men and 64½ for women but rising for people younger than that), you no longer pay them. Make sure your employer knows your age.
What exactly is National Insurance?
Interest on your savings is now paid gross with no tax deducted. The first £1,000 of savings interest is tax-free for basic-rate taxpayers (first £500 for higher-rate). If you pay income tax on your other income and your savings interest is over those amounts, you will have to pay the tax due on it. You should contact HMRC, which will probably change your tax code to recover it. In rare cases you may have to fill in a self-assessment tax return.
Some people on very low incomes can benefit from another £5,000 interest free of tax. That applies if your total income is less than £16,850. On top you can also get the £1,000 savings allowance, making £17,850 free of income tax. The rules are complex. Find out more at gov.uk.
Discover saving and investment tips
The tax-free allowance for dividends has been cut to £2,000 from £5,000. If your annual dividends are worth more than £2,000 in a year – which probably means you have £60,000 in shares or more – at basic rate you will pay up to £225 a year more tax. Dividends are taxed at special rates – 7.5% at basic rate (normally 20%), 32.5% at higher rate (normally 40%) and 38.1% (normally 45%) if you are fortunate enough to pay top-rate tax. The dividend tax allowance is on top of your personal allowance. The rules about tax on dividends and on savings interact in a way that even the HMRC computers cannot get right.
Five ways to invest tax efficiently
Most people never pay inheritance tax (IHT) – only about one in 20 estates is liable to it. But people worry about it, especially if they live in a valuable house.
Normally IHT starts on estates worth more than £325,000. But since April 2017, there has been a special addition for people who leave their home to a child, grandchild or great-grandchild. That addition was £100,000 in 2017/18, but rises to £125,000 this month. An estate of up to £450,000 can escape IHT in those circumstances. If the person who dies is a widow or widower (or bereaved civil partner), then the allowance can be double that – £900,000.
Chancellor Philip Hammond has ordered a review into IHT, which he says is ‘particularly complex’. He has asked the Office of Tax Simplification to make proposals about how it is administered and the rules for gifts and other transactions.
Paul Lewis' guide to Inheritance Tax
As predicted in the February issue, from this month income tax in Scotland will be more complicated than in the rest of the UK. The personal allowance – where tax begins – will be £11,850, as it is in the rest of the UK, because Scotland does not control that. But for incomes above that there will be four new tax rates and three new thresholds. One has changed since our report in February –
see updated table below.
UK rates and bands apply to interest on savings and to dividends. National insurance (NI) contributions are also set by Westminster. The NI rate falls from 12% to 2% at an income of £46,350. So Scottish taxpayers with incomes of £43,430 to £46,350 will pay Scottish higher-rate tax of 41% and the higher rate of NI (12%) – a total tax take of 53p in every pound earned.
Scottish taxpayers are those who live in Scotland or whose main residence is there. They have an ‘S’ in their tax code.
Income tax rates and bands – Scotland and rest of UK 2018/19
||Scotland on earnings, pensions and rental income
||Rest of UK on all income; Scotland on investment and savings income
|Band and rate
||Band and rate
||Over £11,850 to £13,850; 19%
||Over £13,850 to £24,000; 20%
|Over £11,850 to £46,350; 20%
||Over £24,000 to £43,430; 21%
|Over £43,430 to £150,000; 41%
|Over £46,350 to £150,000; 40%
|Top or Additional
|Above £150,000; 46%
|Above £150,000; 45%
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