What seven changes do you need to know about in 2018?

What seven changes do you need to know about in 2018

As 2018 rolls in, many will be thinking of how to make the most of the new year.

Whether it’s a goal to get fit, travel more, take up a hobby or kick a habit, the opportunities are endless.

However, before you hand your gym membership in, book that trip or enquire about those accordion lessons, take some time to familiarise yourself with the upcoming changes that could affect your personal finances this year.

With seven important things happening at the beginning of the new tax year in April, there will likely be something that will apply to you.

In no particular order, here are the things to prepare yourself for in April.

1. Dividend Allowance decrease

The dividend tax-free allowance, currently at £5,000, is set to fall to £2,000.

This will affect those who take dividends, usually:

  • Business owners
  • Contractors
  • Self-employed people

The change, announced in the 2017 Spring Budget, will see someone receiving a £5,000 dividend paying an additional tax of:

  • £225 if they are a basic-rate taxpayer
  • £975 if they are a higher-rate taxpayer

2. Increased Personal Allowance

The Personal Allowance, currently at £11,500, is set to increase to £11,850.

This allowance, which is the amount that can be earned annually without incurring Income tax, will benefit approximately 25.2 million people (Source: Gov.UK)

This £350 increase is the first stage in a two-step plan to raise the Personal Allowance to £12,500 by 2020. This will make people £1,000 better off in the 2019/20 tax year.

3. Help to Buy ISA to Lifetime ISA transfer deadline

First-time buyers who are saving for a deposit using a Help to Buy ISA have a shrinking window of opportunity to double the bonus given by the Government.

Savers have until April 6th 2018 to transfer their Help to Buy ISA to a Lifetime ISA, boosting their contributions substantially. Only one or the other can be used for a home deposit, so those wishing to make the most of this opportunity should ensure their transfer is completed before the deadline date.

4. Higher Lifetime Allowance

The Lifetime Allowance for pensions, currently at £1 million, is set to rise to £1.03 million.

The allowance is a limit on how much can be drawn from a pension without incurring tax, currently at:

  • 25% lifetime allowance charge applies to funds in excess of pension income above the lifetime allowance if they are placed in drawdown or used for annuity purchase
  • 55% lifetime allowance charge applies to excess funds if they are withdrawn as lump sums

The allowance increase is a response to relatively high inflation in the later months of 2017, reaching a high of 3%. This will be good news for those who rely on a pension, and offers those currently preparing for retirement an opportunity to save more for the future.

5. State Pension Increase

The ‘triple lock’ policy, which was the cause of much debate in the 2017 General Election, means that that the basic State Pension increases each year by whichever is the greater of:

  • 5%
  • Average earnings growth
  • The rate of inflation as measured by the Consumer Prices Index (CPI)

Inflation reached 3% in 2017, meaning that the basic State Pension will rise in line with it.

The basic State Pension will rise by 3% from April. That means someone in receipt of a full State Pension, will gain approximately £250 per year.

6. Higher Income Tax rates in Scotland

A large change to Income Tax rates in Scotland will see a rise in taxation for some, and a fall for others.

The four-tier tax band system currently in place is changing to a six-tier structure, with those earning less paying a smaller percentage of tax, and higher earners paying more.

Currently, the system for earned / pension income is:

  • Up to £11,500: Tax-free Personal Allowance
  • £11,501 to £43,000: 20%
  • £43,001 to £150,000: 40%
  • over £150,000: 45%

From the beginning of the new tax year, the structure for earned / pension income will be:

  • Up to £11,850: Tax-free Personal Allowance
  • £11,850-£13,850: 19%
  • £13,850-£24,000: 20%
  • £24,000-£44,273: 21%
  • £44,273-£150,000: 41%
  • Above £150,000: 46%

7. Auto-enrolment contributions increase

For employees who are not already part of a workplace pension, the auto-enrolment deadline expires in February 2018. This will give all eligible workers a way to save for their future, with the added bonus of contributions from their employer and the Government. Currently the criteria are people who:

  • Are at least 22 years old
  • Not yet State Pension Age
  • Earning a salary of at least £10,000
  • Working in the UK under a contract of employment

Workplace pensions can give employees who want to save for their future a boost. Currently, minimum contributions are 2% of qualifying earnings including a minimum of 1% from the employer. From April 2018, contributions will rise to:

  • 2% for employers (rising to 3% in April 2019)
  • 3% for employees (rising to 5% in April 2019)

How will you be affected?

With seven things to watch out for, now is the perfect time to prepare for how they may affect your personal finances.

For more information on the new tax year will affect you, contact us on 0800 612 8099 or request a call back by clicking here.