It is usually the case around this time of year that various tax changes hit the headlines, with the new “Sugar Tax” seeming to be flavour of the tax year this time round! The start of the new financial year on 6 April does indeed usually bring with it a number of changes in various thresholds. But what are the main changes which you need to be aware of? I have summarised five key changes below which will affect most taxpayers and employers.
INCOME TAX
The personal allowance is rising to £11,850 across the UK, meaning any individual with taxable income up to that amount in the tax year ending 5 April 2019 will not pay any income tax at all. This allowance has increased by over 3% from the 2017/18 threshold.
At the same time, the basic rate tax band (for England, Wales and Northern Ireland) is increasing to £34,500, meaning that individuals will be able to have total income of up to £46,350 before they pay income tax at the higher rate. From 6 April 2018 Scottish taxpayers will be subject to different rules, with the introduction of a five-tiered income tax system.
DIVIDEND ALLOWANCE
The tax-free dividend allowance (which has now been in place for two years) is reducing from £5,000 to £2,000 per annum, with effect from 6 April 2018.
Individuals will therefore not have to pay tax on the first £2,000 of dividend income they receive in the tax year. Beyond this, dividends are taxed at 7.5% if you pay tax at the basic rate, 32.5% for higher rate and 38.1% for additional rate taxpayers. The reduction in the allowance means higher and additional rate taxpayers could be worse off by approximately £1,000.
RESIDENCE NIL-RATE BAND
Whilst the Inheritance Tax threshold (‘Nil-Rate Band’) remains unchanged at £325,000, the Residence Nil-Rate Band (RNRB) is rising from £100,000 to £125,000 for deaths on or after 6 April 2018.
We have written about the RNRB in detail previously (most recently in Summer last year) but in broad terms, it provides an additional nilrate band on death but can only be applied to the value of residential property inherited by direct descendants on an individual’s death (the precise rules are complex).
The RNRB will eventually be set at a level of £175,000 per individual (from 2020/21 onwards) but is being ‘phased in’ over four years. It was first introduced last year, starting at £100,000 for deaths on or after 6 April 2017.
Like the ‘normal’ Nil-Rate Band, the RNRB can be transferred between spouses if it is not used in whole or in part when the first spouse dies, even if the first death occurred before 6 April 2017.
NATIONAL LIVING AND MINIMUM
Wage 6 April 2018 also sees increases to the National Living Wage (NLW) and the National Minimum Wage (NMW). The NLW applies to workers aged 25 and above and is increased to £7.83 per hour.
The NMW applies to those workers aged under 25 and is set at four different rates. For those aged 21-24 it is £7.38 per hour, 18-20 year olds must be paid £5.90 or more and the rate for those aged under 18 is £4.20 per hour. There is a special rate of £3.70 per hour for apprentices aged under 19 and those aged 19 and over but who are in their first year of apprenticeship.
PENSION AUTOMATIC ENROLMENT CONTRIBUTIONS
With effect from 6 April 2018, the minimum contributions payable under the Automatic Enrolment legislation will increase, both for employers and for employees who are members of an Automatic Enrolment pension scheme. All employers have a legal obligation to make sure that these increases are implemented, to ensure that minimum contributions are paid.
The minimum employer contribution is doubling and the employee contribution is tripled from 1% to 3%. The table below sets out the current position and the increases in more detail (including further increases which will be implemented next year):
All employers should be aware of these changes and, where possible, factor them into your business’s pricing structures, in order to attempt to maintain existing margins. Employees will also need to be prepared for a reduction in their net pay packets due to the increased minimum employee contributions.