Prepare now for the new tax year

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The new tax rates and thresholds for the 2019/20 tax year will take effect from 6 April, and here’s what you need to know.

Whilst the focus tends to be on year-end tax planning at this time of year, it’s also important to look forward to the new tax year and the changes that it will bring.

From 2019/20, changes will come into effect for key income tax rates and thresholds, as well as pensions.

There are two inflation-busting income tax changes:

  • The personal allowance will rise by £650 (5.5%) to £12,500; and
  • the higher rate threshold will rise by £3,650 (7.9%) to £50,000. However, in Scotland the higher rate threshold (for non-savings, non-dividend income) will be frozen at £43,430.

The personal allowance and higher rate threshold will remain unchanged in 2020/21, so the impact of the above-inflation increase will be soon eroded.

A result of the increased higher rate threshold, outside Scotland, is that the upper limit of earnings on which full rate employee/self-employed National Insurance Contributions (NICs) are payable, will also rise to £50,000.

The net effect is to claw back a significant slice of the income tax saving and, in Scotland, leave earnings in a band between £43,430 and £50,000 suffering a combined income tax (41%) and NICs rate (12% for employees) of up to 53%.

The ceiling for automatic enrolment pension contributions will also increase to £50,000. This, combined with the increase in the minimum overall contribution rate from 5% to 8% means, in many instances, a jump in employee net contributions of about two thirds from the current level. So if the new higher rate threshold takes you out of higher rate tax, your net contributions could more than double.

The other change affecting pensions is a small increase in the lifetime allowance of £25,000 – this sets the maximum tax-efficient value of pension benefits at £1.055 million.

For more information on how these changes will affect you and how you might counter some of the unwelcome side effects, speak to an independent financial adviser who will be able to provide you with advice that is tailored to you.

Taxation is subject to change. The value of tax reliefs depends on your individual circumstances.

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