We consider the changes that came into effect on 6 April that could affect your personal finances in the 2019/20 tax year:
The good news: the Personal Allowance, the amount a person receives before paying Income Tax, is rising significantly in the 2019/20 tax year. Most people will now be able to earn up to £12,500 p.a. before paying Income Tax, which is a welcome increase to the previous £11,850 threshold. This boost of 5.5% is a significant benefit to millions of workers. Additionally, an individual will need to earn in excess of £50,000 (outside Scotland) before they pay Higher Rate Income Tax at 40% – good news for higher earners.
However, the band at which an individual will have to pay Class 1 National Insurance at 12% is increasing. For the 2019/20 tax year, these contributions will be payable on earnings between £8,632 and £50,000, with income in excess of this amount being liable to the lower 2% rate. Previously, the upper threshold was £46,350 and this increase keeps it in line with the Higher Rate Income Tax level. This means that the additional take-home pay many workers will benefit due to the Income Tax changes, will be partially offset by the increase in National Insurance contributions they will be required to make.
Since 2012, UK workers have gradually been enrolled in to their workplace pension scheme as an encouragement to fund their retirement. The statutory requirements for both employer and employee pension contributions have steadily risen and the most recent change, which came into effect on 6 April 2019, requires the firm to pay 3% of qualifying earnings (up from 2%), while the employee is required to pay in at least 4% (up from 2.4%). Tax relief from HMRC takes the total contribution to 8% of qualifying earnings. While some media reports have portrayed this as a negative for workers due to the decrease in take-home pay, we welcome these changes, especially as the increase will be largely offset by the reduction to Income Tax detailed above. Furthermore, we believe these contributions alone are likely to be only a small step towards funding a retirement that many people dream of.
An uplift to the Capital Gains Annual Exemption means that profits from relevant assets disposed in the 2019/20 tax year must exceed £12,000 (up from £11,700) before an individual is liable to Capital Gains Tax (CGT), with a corresponding increase to £6,000 for Trusts. Additionally, there is a significant change for individuals hoping to benefit from Entrepreneur’s Relief, which is the reduced 10% tax rate payable by those selling eligible businesses. From 6 April 2019, the ‘qualifying period’ has increased from one to two years, meaning that a business owner must have held at least 5% of the shares in the business for this period of time in order to benefit from the lower level of tax on the capital gains when selling their stake in the business.
This article is for information purposes only and should not be construed as advice. Taxation reliefs, levels and bases can change in the future and the above is our understanding of current taxation legislation. Tax is dependent on your own individual circumstances and is subject to change. The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.