Today marks the start of the new 2017/18 tax year, and this month a long list of changes come into effect that could impact on your household finances.
There’s good news for the low paid thanks to an increase in the National Living Wage, and middle earners also stand to benefit from a rise in the threshold at which they have to start paying higher-rate income tax. Pensioners will see an increase in how much the government gives them to live off and many individuals coming into an inheritance will see the taxman’s slice of their gains narrow.
But the changes aren’t good news for everyone – especially most people buying new cars, who can expect to pay more Vehicle Excise Duty. Here’s what’s new in the world of personal finance this month.
Increased personal allowance
The amount of money you can earn each year before having to pay income tax is now £11,500, up from £11,000. It will increase further to £12,500 by the end of parliament in 2020. From then on it will rise in line with the Consumer Prices Index measure of inflation, just as the higher-rate income tax threshold does. The Treasury says that since 2010, the increases to the personal allowance mean that a typical basic-rate taxpayer will pay £1,005 less in income tax in the new 2017/18 tax year than they did in 2010/11.
Higher-rate income tax threshold has gone up
The amount of money you can earn before having to pay the higher rate (40 per cent) of income tax has increased to to £45,000, an improvement from £43,000 last year. The government plans to raise it to £50,000 by 2020.
State pension to rise by 2.5 per cent
The new state pension, which arrived a year ago today, has gone up from £155.65 to £159.55 a week, and the old state pension has risen from £119.30 to £122.30.
National Living Wage rises
A 30p per hour improvement for workers aged 25 arrived on 1 April, raising the minimum wage from £7.20 an hour to £7.50. As a result, this will give more than a million workers a pay rise, according to the Office for Budgetary Responsibility. The rest of the NLW age bands have risen from £6.95 to £7.05 an hour for 21 to 24-year-olds, £5.55 to £5.60 for 18 to 20-year-olds, £4 to £4.05 for 16 to 17-year-olds and £3.40 to £3.50 for apprentices.
£1,000 tax allowances for property and trading income
Two new income tax allowances of £1,000 each for trading and property income have come into force. They will benefit private investors as well as homeowners letting their property via websites such as Airbnb. Consultancy and audit company Deloitte says individuals with trading or property income below £1,000 will no longer need to declare or pay tax through self-assessment. It added that where gross income receipts are in excess of these amounts, the recipient can simply take the £1,000 allowance as a deduction against their gross income.
All change for ISAs
The amount savers and investors can put into Individual Savings Accounts has risen to £20,000, up from £15,240. ISAs enable interest and returns to be taken tax free and money can be deposited across any combination of cash, stocks and shares, junior and innovative finance ISAs. And another brand new ISA has just launched – the Lifetime ISA. It allows those under 40 to save up to £4,000 a year until they turn 50 and receive a 25 per cent bonus from the government as long as they put the money towards the purchase of a house or their retirement. Find out more about it here.
NS&I to launch 2.2 per cent bond
National Savings & Investments is to launch a three-year Investment Guaranteed Growth Bond that will pay 2.2 per cent. It will be available for a period of 12 months to those aged 16 and above wishing to put away between £100 and £3,000 pounds. The account must be opened and managed online.
Inheritance tax reprieve
While previously estates were subject to a tax liability of 40 per cent on any value exceeding £325,000, a new transferable ‘main residence’ allowance has come into effect. It allows individuals to pass on an extra £100,000 tax free to their children and grandchildren when their primary home is included in their estate. It means married couples, and those in civil partnerships, can pass on £850,000 to their loved ones without them landing a hefty tax bill in the process. This additional allowance is set to rise to £1 million by 2021.
Tax hike for new car buyers
Most people buying a new car from now on will be landed with a hefty tax bill. This is because the way Vehicle Excise Duty is calculated has changed. Hundreds of thousands of cars previously exempt will now incur charges. The new system is based on CO2 emissions and drivers of fully electric cars that don’t emit any CO2 won’t pay. All other vehicles will be charged at a rate commensurate with their emissions. In the first year of ownership a one-off charge ranging from £10 to £2,000 a year will be levied. According to buyacar.co.uk, the average emission for new cars bought last year was 121.4g/km CO2 and under the old system they incurred VED at just £30 a year. But cars with the same level of emissions bought from now on incur a one-off charge of £160 and an annual charge of £140 from the second year of ownership onwards.
The new VED system will also heap further pain on anyone buying a new car with a list price of £40,000 or more. From their second year of ownership, they will be hit with an extra annual charge of £310 for a period of five years, meaning they will pay VED of £450 in years two to six of ownership. The charge then reverts to the standard rate of £140 a year thereafter. The experts at buyacar.co.uk warn that because the rule is based on list price, the charge still applies if you get a new car discount that brings the cost of your car to less than £40,000.
Salary sacrifice clampdown
Workers receiving benefits in kind from their employer such as gym membership, a mobile phone contract, car parking or death in service policies will lose the tax benefits from this month. The government is clamping down on salary sacrifice schemes, which enable workers to reduce their taxable pay and employers to save on National Insurance Contributions. Effectively, employees swapping salary for benefits will pay the same tax as the vast majority of workers who buy them out of their post-tax income. However, non-cash perks such as pensions (including advice), childcare, Cycle to Work and ultra-low emission cars are excluded from the crackdown. The government says salary sacrifice contracts in place before April 2017 will be protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021.
Laura Whitcombe is knowledge and product editor at ThisisMoney.co.uk.