April 2018 will bring plenty of changes that will affect your personal finances. Here are 10 things you need to be aware of.
1. Wages are going up
On 1 April 2018, the National Living Wage will rise. If you are a full-time worker on basic pay the increase should mean you get £600 more over the year, but the exact amount will depend on your age and how many hours you work.
If you are over 25, your hourly basic pay will rise from at least £7.50 to £7.83. Workers aged 21 to 24 will get an increase from £7.05 to £7.38, and those aged 18 to 20 will get a rise in minimum wage to £5.90.
Anyone aged 16 to 18 should get an increase in their basic wage from £4.04 to £4.20.
Apprentice wages will also be affected with their basic hourly rate going up from £3.50 to £3.70. To get this you must be either under 19, or over 19 but only in the first year of an apprenticeship.
Feel you should be earning more? Read our guide to getting a pay rise.
2. Pension contributions will rise
You may be getting paid more, but you’ll also be paying more into your workplace pension in 2018. From 6 April, the minimum pension contribution for workplace pension schemes will rise from 0.8% of your salary to 2.4%.
That is more than triple the current rate and means someone earning the average salary of £27,000 will see their annual minimum pension contribution rise from £169 to £517.
“While some might be tempted to opt-out due to the extra hit on their disposable income, doing this would mean missing out on the bonus of employer and government contributions, the latter in the form of tax relief,” says Tom Selby, senior analyst at AJ Bell.
“The increase coming in April will take the total contribution up to 5% once the employer contribution of 2% and tax relief of 0.6% have been added. Those numbers will increase again in April 2019.”
The gradual increases in the minimum contributions to workplace pensions will mean that someone paying the bare minimum into their pension will build up a pension pot worth £219,000 over 40 years, according to AJ Bell.
However, only making the minimum contribution could leave you struggling in retirement if you have delayed starting a pension.
Find out how much you should be paying with our guide to pension contributions.
3. Lifetime allowance increase
Before you get too carried away with how much you are paying into your pension, remember that there is a limit on how big your pension can get before the taxman swoops in and takes a chunk.
The Lifetime Allowance means if the total value of your pension pot rises above £1 million you could face a punitive tax charge of 55% if you take the excess as a lump sum, or 25% if you take it as income.
The good news is the Lifetime Allowance is going up in 2018 for the first time since 2010. In April it will rise in line with inflation to £1,030,000.
“It means there is a bit more scope for anyone who is approaching the £1 million mark and an extra £7,500 of tax-free cash for anyone who is lucky enough to have reached the allowance,” says Mr Selby.
Here is everything you need to know about the Lifetime Allowance.
4. State Pension on the up
Thanks to the good old triple lock the state pension will go up by 3% in April. The triple lock is a government promise that the state pension will rise every year by the highest of earnings, inflation or 2.5%. It isn’t popular with many in the government as it is costing the Treasury a lot of money, but no-one has dared scrap it.
A report last March called for the triple lock to be ditched, and even former pensions ministers have said it needs to go.
Pensioners have rising inflation to thank for the rise this year, although inflation also means the cost of everything they’re buying is on the rise too.
You can find out how much state pension you are likely to receive when you retire by applying for a state pension forecast from the government.
Another way you can increase your state pension is to defer when you take it. Once you reach state pension age you have to apply to the government to start receiving your pension, if you wait a while to start claiming you’ll get slightly more when you do claim it to make up for the missed years.
5. Personal Allowance increase
From April 2018, we will all be able to earn £11,850 a year before we start paying income tax, a £350 rise from thelevel in the 2017/18 tax year.
6. Junior Isa allowance rising
While the main individual savings account (Isa) allowance will stay the same in the 2018/17 tax year – sticking at £20,000 – the Junior Isa allowance will rise from £4,128 to £4,260.
If you have a child, or grandchild, aged under 16 they can have a Junior Isa. They work just like a normal Isa with all gains tax-free, but any money paid in cannot be accessed until the child turns 18.
7. Buy-to-Let mortgage interest rules continue to change
In April 2017 the government started the slow eradication of mortgage interest relief for landlords. Under the old system landlords could pay income tax on their profits after mortgage interest had been deducted.
For example, if you received £700 a month rental income and paid £300 a month mortgage interest then over the year you received £8,400 in rent and paid £3,600 in mortgage interest. So, your taxable income was £4,800 (8,400-3,600) meaning a basic-rate taxpayer owed £960 in tax and a higher-rate taxpayer would owe £1,680.
This is now being phased out. Last year you could only claim 75% of your mortgage tax relief, but this will fall to 50% from April this year.
This means that you can only deduct 50% of any mortgage interest you have paid on buy-to-let properties from your profits when you are calculating how much income tax you owe. You will receive a 20% tax credit on the other 50% of your mortgage interest.
Using the example above this would mean you would only be able to deduct £1,800 of your mortgage interest from your £8,400 rental income, receiving a 20% tax credit on the other 50%. This would mean a basic-rate taxpayer would still owe £960 but a higher-rate taxpayer would now owe £2,280.
8. Isa inheritance rules are changing
Since April 2015, spouses and civil partners have been able to inherit their deceased partner’s Isas without them losing their Isa status. Currently, the value of their Isa holding upon their death is granted as an additional permitted subscription (APS) to the surviving spouse. This means they can go and invest that amount into Isas without it affecting their own Isa allowance.
However, this system was flawed as the (APS) didn’t account for any growth in the Isa holdings between the person dying and their estate being released so their partner can invest the money in their own name. This can mean part of their Isa can’t retain its tax-free status as the APS doesn’t cover it all.
This will change from April when the Isa of someone who has died will become a “continuing Isa” that won’t accept any more deposits but will continue to grow and remain tax-free. The APS will be valued when the estate is formally closed.
9. Marriage Allowance will rise
The new tax year will also bring a rise in the Marriage Allowance with married couples able to pass up to £1,185 of their personal allowance to the higher-earning spouse.
In 2018/19, the Marriage Allowance allows a spouse who earns less than £11,850 – so pays no income tax – to pass up to £1,185 of their personal allowance to their husband or wife, provided they don’t earn more than £45,000 a year (£43,000 in Scotland).
This allows married couples to bring down their overall income tax bill. Despite the money-saving attraction as many as two million married couples don’t take advantage of this tax break.
10. Dividend Allowance being slashed
After all that good news, there is one change that could put a serious dent in your earnings in 2018. The Dividend Allowance – how much you can earn in dividends before tax is due – is being slashed from £5,000 to £2,000 in April.
Any income you receive from dividends above the allowance is taxed at a rate of 7.5% if you are a basic-rate taxpayer, soaring to 32.5% if you are a higher-rate taxpayer and 38.1% if you are an additional rate taxpayer.
In pounds and pence, someone who receives £5,000 in dividends would previously have paid no tax, but next year will be hit with a tax bill of £225 if they are a basic-rate taxpayer, £975 for a higher-rate taxpayer and a whopping £1,143 for an additional rate taxpayer.
The way to avoid this big new tax bill is to get your investments into a tax-efficient wrapper such as an investment Isa or Sipp (self-invested personal pension) before the allowance cut comes in. Do that and you will be able to continue to earn dividends tax-free.