Clear benefits are starting to emerge from income tax changes – mostly in favor of the Chancellor
I often find myself talking about tax planning in generic terms. And that’s all well and good, but the generic has its roots in often granular specifics.
This is certainly true when it comes to tax planning.
Some of the underlying rules are positively labyrinthine. I mean, dividend allowance, personal savings allowance, and starting rate bracket?
The well-used phrase “Well, I wouldn’t start from here” comes to mind. But, to invent another, we are where we are.
It is quite important to understand the changes to income tax and their implications.
Miss a couple and it probably wouldn’t be the end of the world. Miss a couple regularly and you can quickly anchor your knowledge in the mists of time.
This is not a great place for an advisor looking to justify their fees based on their expertise and commitment to maintaining proper financial plans.
So let’s take a look at the latest income tax changes and what they mean, starting with the proposed rates for 2019/20:
- The cap on the starting rate of savings income remains at £ 5,000 and the tax rate on income in this bracket is kept at zero;
- The base rate cap is increased to £ 37,500, so that the upper rate tax threshold (i.e. the base rate cap [£37,500] plus the basic personal allowance [£12,500]) becomes £ 50,000;
- The basic tax rate remains at 20 percent and will apply to taxable income between £ 1 and £ 37,500. Dividends in excess of the £ 2,000 allowance will be taxed at 7.5% if they fall in the base rate tax bracket. Taxable income above £ 37,500 will be taxed at 40 percent (32.5% for dividends) up to the threshold of £ 150,000, when the additional tax rate applies;
- The additional tax rate (which applies to taxable income over £ 150,000) remains at 45 percent (38.1 percent for dividends);
- Trustees of discretionary trusts are subject to an income tax of 45 percent (38.1 percent on dividend income), on income above their standard rate range (normally £ 1,000).
Now for the personal allowances proposed for 2019/20:
- Personal allowance is increased from £ 11,850 to £ 12,500. When a person’s adjusted net income exceeds £ 100,000, the level of the Basic Personal Allowance will be reduced by £ 1 for every £ 2 over £ 100,000 until it reaches zero. This means that in 2019/20 the Basic Personal Allowance will be reduced to zero when the Adjusted Net Income is £ 125,000 or more;
- The married couple’s allowance, which is only available if at least one of the spouses was born before April 6, 1935, is increased to £ 8,915. There is a reduction in the MCA of £ 1 for each additional income of £ 2 above the total income threshold which is raised to £ 29,600. The MCA will not be reduced below £ 3,450 (the “Minimum Amount”);
- The MCM and child support relief continues to be provided in the form of a tax reduction at the rate of 10 percent;
- Spouses and registered civil partners will be entitled to transfer £ 1,250 of their personal allowance (called marriage allowance) to their spouse or registered civil partner provided that after the transfer neither spouse pays tax in excess of the rate of based.
The personal savings allowance is unchanged for 2019/20. Generally speaking, this means that if an individual is a base rate taxpayer, the first £ 1,000 of savings income will not be taxed.
If he is a higher rate taxpayer the first £ 500 of savings income will be tax free and if he is an additional rate taxpayer he will not receive any allowance personal savings.
So how about planning in light of all of this? For all couples, at the bare minimum, personal allowances, starting / base rate tax brackets, and dividend and personal savings allowances must be fully utilized.
This is particularly beneficial when the income can be legitimately transferred from a spouse taxpayer at a higher or additional rate to a non-taxpayer spouse at the starting or basic rate.
For those with cash and investments, this will usually be facilitated by an unconditional transfer of income-producing assets from the more taxable spouse to the other.
When initially introduced in 2013, the use of the transferable marriage allowance was very low.
However, it has increased significantly since then and couples should make sure that they do not lose the opportunity to transfer the allowance when they are entitled to it.
Such transfers would generally be neutral in terms of capital gains tax and inheritance tax, as those between spouses / registered civil partners living together are treated as transfers on a no-gain / no-loss basis. for CGT purposes, and transfers between spouses / registered civil partners domiciled in the UK partners (living together or not) are exempt from IHT without limit.
Devil in detail
Everything is fine and, in fact, quite simple. Effective, proven and tested. Almost nothing revealing …
However, the introduction of the new higher rate threshold of £ 50,000 has some interesting hidden consequences.
The Chancellor’s budget announcement that the personal allowance would increase to £ 12,500 and the base rate bracket to £ 37,500 in 2019/20 came as a surprise.
Prior to this point, there had been suggestions that he could have frozen both at this year’s level.
In hindsight since then, the consequences of the increases and the resulting higher rate threshold of £ 50,000 are starting to be felt. Here are just a few:
- Meeting the 2017 Conservative Manifesto targets for personal allowance and the higher rate threshold a year earlier only has a one-time cost, assuming they would have been met in 2020/21 anyway. This is because there will be no increase in the personal allowance or the higher rate threshold in 2020/21, which means that from that point on the Chancellor will work from the same personal allowance. and a higher rate threshold for indexing the CPI;
- The increase in the upper rate threshold is automatically carried over to the earnings ceiling for full rate contributions to national insurance. An employee earning £ 50,000 per year will save £ 860 per year in personal allowance tax and the increase in the higher rate threshold in 2019/20, but simultaneously lose £ 340 – 40% – in additional NICs;
- A higher rate threshold of £ 50,000 now means that the threshold at which the high child benefit levy is triggered corresponds to the end point of tax at the base rate. Thus, a person with two children could find themselves in the situation where their marginal income tax rate (ignoring the NICs, a de facto tax) goes from 20% to £ 49,999 to 57.89% of 50,000 at £ 60,000;
- A personal allowance of £ 12,500 means that the income bracket triggering the reduction in the allowance will drop from £ 100,000 to £ 125,000. See the table below to find out what marginal tax rates will look like in 2019/20. While the effect for an additional rate taxpayer is the same as if all income between £ 100,000 and £ 150,000 were taxed at the old additional rate of 50%, the overall result is better for the Exchequer because it there will be more people at the first £ 25,000 of that band, paying a 10% higher rate;
- The upper end of the bracket income for auto enrollment has increased to match the higher rate threshold at £ 50,000. Taking into account the increase in the lower income threshold of £ 104 (to £ 6,136), this means that the range will widen by £ 3,546 (8.8%) on an annual basis, as will the rate of global minimum contribution goes from 5% to 8%. percent. The most affected will be the one who earns £ 50,000, as their larger contributions will also come with a 20% tax break instead of 40% in the next fiscal year.
The budget reinforced the arguments that the income tax system needs a drastic overhaul.
However, politics and the lack of cash means the UK will continue to limp with a system built not on purpose but by the various adjustments of successive Chancellors.
Tony Wickenden is Co-Managing Director of Technical Connection (a St James’s Place Wealth Management group company). You can find him tweeting @teccon