Saturday 6 April heralds the start of a new tax year. Out with the old and in with the new rates, reliefs and rules.
Tax planning is one of the aspects of advisers’ propositions that clients really value and are prepared to pay for, so make sure you are on top of the changes.
The first thing to consider is that the personal allowance has leapt up by an inflation-beating 5.5 per cent to £12,500, which will take lots more people out of the taxpayers’ club altogether.
The threshold at which higher-rate tax kicks in has also increased by a hefty 8.7 per cent to £37,500, making the higher-rate threshold of the personal allowance plus the top end of the basic-rate tax band £50,000. So, a whole lot of clients who have been higher-rate taxpayers during 2018/19 will cease to pay these rates too.
Clients likely to see more tax-free income this year, or who have some more headroom before they are taxed at higher rates, have several planning ploys at their disposal, such as transferring assets between highly-taxed family members and those on nil or basic rates, encashing life assurance bonds, drawing more pension and investing in assets that generate more income.
That said, a by-product of the increase in the personal allowance is that the effective tax band of 60 per cent has now widened to between £100,000 and £125,000. The income threshold at which the personal allowance is withdrawn at the rate of £1 for every £2 of extra income remains at £100,000.
The additional-rate threshold also stays unchanged at £150,000, bringing even more clients into the top-rate tax net.
It is never too early in the tax year to check whether any increase in clients’ income will move them into the personal allowance withdrawal band. There is a similar trap for child benefit where at least one parent has an income over £50,000 – an income threshold and band that is also not changed.
Similarly, keep a constant eye on whether clients have moved above the £150,000 income level.
These rates and thresholds do not apply in Scotland, where the lucky inhabitants have no less than five tax bands from 19 per cent to 46 per cent, and the threshold at which higher-rate tax kicks in remains unchanged at £43,430 – £6,570 lower than in the rest of the UK.
As it costs a taxpayer with an income of £50,000 a year £1,544 extra to live in Scotland, there has got to be more scope for tax planning there.
The National Insurance contribution thresholds have been increased by nearly 8 per cent – so the upper earnings limit for employees and the upper profits threshold for the self-employed is rising to £50,000, the same as the higher rate threshold outside Scotland.
Do not forget class 2 NICs that were due to disappear in April have been reprieved until the end of the current parliament. The class 2 rate for the new year will be £3 a week.
The increase in the personal allowance and the basic-rate income tax band has been neatly timed to coincide with the increase in the minimum contribution levels for auto-enrolment.
Most clients will not be directly affected by this, as they should be contributing more than the bare minimum and many will not be in workplace pensions anyway. More relevant will be the increase in the lifetime allowance to £1.055m in line with inflation.
Elsewhere, the rules around venture capital trusts have been tightened up in terms of the proportion of funds that have to be held in “qualifying” investments – from 70 per cent to 80 per cent. However, the period for reinvesting gains on the disposal of qualifying holdings is increasing from six months to 12 months.
The annual capital gains tax exempt amount for individuals has risen to a nice and memorable £12,000 and half that for the allowance for trusts. The minimum period for the entrepreneurs’ relief qualifying conditions to be met has doubled to two years.
Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum