Tax changes at a glance
The new tax year has brought in a host of tax reforms. Here is the Moneywise guide to the changes impacting your personal finances this tax year.
The most popular tax change is likely to be higher allowances for ISAs. The annual limit on saving through ISAs is now £7,200, of which up to £3,600 can be saved as cash. If you choose to invest the maximum amount in cash, then you can only invest £3,600 in stocks and shares.
As well as changes to allowances, ISAs are no longer distinguished by mini and maxi tags – instead, mini cash ISAs, TOISAs and the cash component of a maxi ISA have automatically become cash ISAs. Mini stocks and shares ISAs and the stocks and shares component of a maxi ISA have automatically become stocks and shares ISAs.
Personal Equity Plans (PEPs) have now automatically become stocks and shares ISAs.
Find the best cash ISA products on the market in the Moneywise ISA round-up.
Another significant tax change is the simiplication of tax bands. As part of this, the 10% starter rate of income tax has been scrapped while the basic rate of income tax has dropped from 22% to 20%. Higher rate taxpayers will continue to pay 40%, and this will kick in on income above £41,435.
Personal allowances have also increased for everyone (see table below) with those aged over 75 seeing the biggest increase.
The upper earnings limit for the 11% rate of National Insurance has increased from £670 a week to £770 (£40,040 a year). People who earn more than this will be taxed at 1%.
Taxpayers who have been classified as non-domiciled for seven years will now have to pay £30,000 a year to keep this status and will be taxed on their worldwide earnings, rather than just those in the UK.
The changes to income tax will impact on government top-ups on pension contributions.
Capital Gains Tax
Previously, the top rate of capital gains tax was 40% and investors selling shares or other assets could claim indexation relief (which reduces their gain by the annual rate of inflation for the years between 1982 and 1998) or taper relief depending on how long they had held the investment.
However, an 18% flat-rate of capital gains tax has now kicked in, and taper relief and indexation allowances have been scrapped. The exemption for capital gains tax has also risen to £9,600.
As a concession to entrepreneurs, owners of small business as well as employees and company directors who own at least 5% of shares in the company will only pay 10% capital gains tax on any profits under £1 million.
The nil-rate band for inheritance tax has now risen to £312,000 a year. Married couples and those in civil partnerships can also combine their allowances, meaning they will not have to pay inheritance tax on the first £624,000 of their estate.
Benefits and tax credits
Tax credits, child benefits and state pensions have all increased in the new tax year.
The basic working tax credit has risen by £70 a year, while the child element of the child tax credit has gone up by £240.
Child benefits for the eldest child have gone up by 70p a week, with benefits for other children rising by 45p.
Finally, category A or B state pension has gone up by £3.40 a week.
For all changes to tax credits, child benefits and state pensions visit the HM Treasury website.
Income tax (£ per year)
|Personal allowance (age under 65)||£5,225||+ £210||£5,435|
|Personal allowance (age 65-74)||£7,500||+ £1,480||£9,030|
|Personal allowance (age 75 and over)
10% married couple's allowance
|10% married couple's allowance
(aged 75 and over)
|10% married couple's allowance (minimum amount)||£2,440||+ £100||£2,540|
|Income limit for age-related allowance||£20,900||+ £900||£21,800|
|Blind person's allowance||£1,730||+ £70
Pension schemes allowances
|Annual allowance||£225,000||+ £10,000||£235,000|
|Lifetime allowance||£1,600,000||+ £50,000||£1,650,000|
|Source: HM Treasury 07/04/08|
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Child tax credit
A scheme started in 2003 that sought to replace a raft of other tax credits and benefits, the payout depends on the number of dependant children in a family, and its level of income. The amount of credit is reduced as income increases. It is payable to the main carer of a child, usually the mother, and is available whether or not the recipient is working.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.