Happy New Tax Year: The Changes to Your Tax Allowances This Year
11 April 2017 by
The new tax year has arrived and with it comes the latest shake-up of the Government’s tax and Isa regime and the launch of the new Lifetime Isa. Below we have detailed the key changes to be aware of.
The tax-free personal allowance rises from £11,000 to £11,500 in this tax year. The higher rate tax band also increases to £45,000. The Government aims to increase the personal allowance to £12,500 and the higher rate tax threshold to £50,000 by the end of this parliament.
ISAs and the new Lifetime ISA
There is a big jump in the Isa allowance this year, which increases to £20,000 from £15,240 last year. The Junior Isa allowance is also increasing to £4,128 from £4,080, so it is worth making sure that you make the most of these tax-free wrappers.
The big change in the Isa world is the launch of the Lifetime Isa or LISA this month. This enables those aged between 18 and 39 before the 6th April 2017 to save up to £4,000 a year and receive a Government bonus of 25%. For every £4 that is paid into the account, the Government will pay in £1 - up to a limit of £1,000 a year – until savers reach the age of 50.
The aim of the LISA is to encourage those under the age of 40 to save towards a home purchase or retirement. As such, before they reach 60 LISA holders are only allowed to use the money to purchase a first property worth up to £450,000. After they hit 60, savers are free to do as they like with their LISA cash.
It is possible to make withdrawals for other purposes before you reach the age of 60, but the main stumbling block will be the hefty 25% Government charge levied for doing so.
Whilst the offer of a 25% Government bonus is attractive, it’s likely that it still makes sense for most clients to contribute to a pension and that a combination of pensions and ISAs will remain the best solution for saving towards retirement.
The LISA could be a useful top-up for those aged under 40 who have funds to invest and limited income to receive tax relief on when making pension contributions, or those who are already making full use of their annual pension contribution allowance.
There is one small change to the pensions regime this year in that the money purchase annual allowance is falling from £10,000 to £4,000. This affects those who have taken flexible benefits from their pension but still wish to make new contributions.
The standard annual allowance remains at £40,000 for those earning under £150,000, and continues to taper down by £1 for every £2 earned over £150,000 to a minimum annual allowance of £10,000.
The lifetime allowance remains at £1m.
Dividend tax allowance
The dividend tax allowance will remain at £5,000 for 2017/2018 tax year. However, from April 2018 it will fall to £2,000.
If you would like to discuss your options for saving towards your retirement, please call us on 020 3795 4757.
Netwealth does not provide tax advice. Taxation, and reliefs from taxation can change at any time and are dependent on individual circumstances.