April 6th marks the start of a new tax year. What actions should you be taking, and how can you plan to make full use of your tax benefits and allowances?
Coronavirus is impacting every part of life in the UK, but there are still some key events which are happening as planned. Last month the Chancellor of the Exchequer, Rishi Sunak, set out the UK budget. It proposed a huge number of changes, including support for the current crisis, an increase to the national living wage, changes to pensions, and a host of other measures. The Chancellor had to say: “We just had a general election where people voted for change … this budget delivers on that change. Yes, it is a budget that provides for security today, but it is also a plan for tomorrow.” Let's look at some of the Budget announcements that may affect you.
Pensions If you’re planning to retire in the near future or if you’re already in retirement, here’s how you could benefit from the pensions changes.
State pension is rising by 3.9% There was a big change to our State Pension system in 2016, when we moved to a new system calculated in a different way. Whether you're subject to the new or the old rules, on April 6th the state pension increased by 3.9%. It means the rate for the new state pension will increase from £168.60 to
£175.20 a week, or £9,110 a year, for someone eligible for the maximum pension. The actual amount you get depends on your National Insurance record. If you reached state pension age before 6th April 2016 you'll be subject to the old rules and you'll need to check your position on the Government website if you're in any doubt. The rise in the pension is due to the triple lock guarantee, which ensures that pensions increase alongside inflation, UK workers average earnings or a minimum of 2.5%. Tapered annual allowance increases The annual pension allowance is the maximum amount of money you can put into your pension in a year without being taxed. The annual allowance is capped at £40,000. High earning individuals are restricted in how much money they can save into their pension. Previously the annual allowance of £40,000 was reduced or 'tapered' for those earning over £110,000 a year.
It means that for every £2 of 'adjusted income' that goes over £150,000, the annual allowance for that year reduces by £1. In simple terms, adjusted income is all income plus any pension contributions paid by an employer.
However, on the 6th April the income threshold was increased to £200,000, meaning anyone who earns under this amount will not be affected by the tapered annual allowance.
Who will this impact?
This change will impact higher earners, and has been designed to address the problem for medical professionals who have found themselves heavily penalised by the taxman for working additional hours where they were already contributing the maximum to their pension - although it isn't only medics who will benefit.
Lifetime allowance increases The lifetime allowance – the maximum amount you can have in a pension over a lifetime – has increased from £1,055,000 to £1,073,100 for 2020/21. When you come to draw your pension, if the value of all of your combined pension plans exceed this amount you could be liable for tax on the excess. If this applies to you, there may be actions you can take to reduce the tax - speak to our financial planning team for specific advice. Individual Savings Accounts (ISAs) There is no change to the amount you can invest in ISAs, it's still £20,000 for this tax year. If you have surplus savings or investments it makes sense to make use of your ISA allowance immediately, gaining another year of tax-free growth and income. Why wait until the end of the tax year to use your allowance when you could be gaining the benefit now? Capital Gains Tax (CGT) The amount of gains you can incur before you have to pay CGT has increased from £12,000 to £12,300 on 6th April. If you have investments that have been affected by the decline in asset prices as a result of the coronavirus, it may be worth selling some shares or funds now to crystallise losses, even if you intend to hold on to your portfolio for the long term. As and when your portfolio recovers, as it eventually will, you can then use these losses to set against future gains and keep your tax bill down. Entrepreneurs Relief If you're planning on selling your business in the next few years, this change could be quite expensive for you. Previously business owners could look forward to only paying a Capital Gains Tax rate of 10% on the first £10 million of gains, but this has now been slashed to the first £1 million only. If your business is valuable this could cost you an extra £900,000 in tax. Inheritance Tax (IHT) There were no further changes to IHT in the Budget, but 6th April is the date when Main Residence Relief ramps up to its maximum £175,000 in addition to the existing basic inheritance tax-free allowance of £325,000. For married couples or civil partners owning their home who pass on their assets to a direct descendant, this means that the combined tax-free amount is now £1 million, fulfilling David Cameron's pledge from April 2015. The rules around Main Residence Relief are quite complex, and if you're affected by Inheritance Tax our Financial Planning team can give you sound advice.
Getting Good Advice Are you looking to retire and need advice, or you want to know how these changes impact you? Here at Woodgate Financial Planning, many of our clients have been with us for decades, trusting us to manage, protect and grow their wealth in order to find financial freedom. If you're looking for advice about your pension, your taxes, your business or your retirement, why not give us a call today to find out how we can help you?
Sources: 1 https://www.theguardian.com/uk-news/2020/mar/11/key-points-from-budget-2020-at-a-glance 2 https://www.gov.uk/new-state-pension/what-youll-get 3 https://inews.co.uk/news/uk/state-pension-increase-2020-april-when-date-how-much-explained-1884164 4 https://citywire.co.uk/funds-insider/news/qanda-what-is-the-state-pension-triple-lock-guarantee/a686253 5 https://www.moneysavingexpert.com/news/2020/03/budget-2020--threshold-for-pension-tax-relief-raised-to-p200-000/