A Quick Guide to Allowance Changes for 2017/18

guide

Income tax threshold increases

The personal allowance for income tax is going up to £11,500. Alongside this, the basic rate limit will be increased to £33,500, meaning higher rate tax will only be payable on earnings over £45,000.   The rates are slightly different for those residing in Scotland with the basic rate limit being set at £31,500, meaning higher rate tax will be payable on earnings over £43,000.

ISA subscriptions

The annual allowance for contributions to Individual Savings Accounts (ISAs) is going up significantly to £20,000 per person.

6 April 2017 will also see the launch of the new Lifetime ISA (LISA). Anyone aged 18 up to the age of 40 will be able to open a Lifetime ISA and contribute up to £4,000 a year; receiving a 25% government top-up. This can be done every year up until the age of 50, with penalty free access to the fund allowable from the age of 60, or if the money is needed to purchase your first property.

The main drawback of the LISA is that should you need to access your money before the age of 60 and you already own a property, you will be charged a fee of 25% of the total withdrawal; the only exemption to this being if you have been diagnosed with a terminal illness. It should also be noted that any contributions made into a LISA during any tax year will form part of your annual £20,000 ISA allowance.

The idea of the new LISA is to act as a complimentary savings scheme for younger savers and is not intended to be a replacement for traditional pensions. There are different benefits and drawbacks of the Lifetime ISA vs the Help to Buy ISA and traditional pension savings vehicles. For further help in this area, or if you need any advice regarding saving for children or grandchildren, please get in touch with your adviser.

Residence Nil Rate Band 

Whilst the normal IHT allowance of £325,000 will remain unchanged, the new Residence Nil Rate Band (RNRB) will be phased in over the coming years, starting from April 2017. Initially being introduced at a level of £100,000, the allowance will be applicable to individuals that own a home and have direct descendants, such as children or grandchildren.  It is proposed that the RNRB will increase annually until 2020 – to £125,000 in 2018/19, to £150,000 in 2019/20 and to £175,000 in 2020/21. The new allowance is in addition to the main £325,000 nil rate band thus providing a total potential allowance of £500,000 per individual.

As with the normal IHT nil rate band, the RNRB will be transferable between married spouses/those in a civil partnership. In theory therefore, a married couple with children/grandchildren who will inherit the main residence will have an overall allowance of up to £1 million by the start of the financial year in 2020.

However, for estates valued in excess of £2 million the RNRB will be gradually withdrawn or tapered away.

Comment

The changes scheduled from April 2017 present a positive overall picture for savers and investors.

So as far as income tax allowances and thresholds are concerned, the government say the new measures will benefit 28.9m individuals of whom 24.1m will be basic rate taxpayers (an average real gain of £56) and 4.9m will be higher rate taxpayers (an average gain of £233). It is anticipated that the changes will also take a further 424,000 individuals out of income tax altogether.

The increase in the annual ISA allowance is significant. Alongside tax-free returns, accessibility in the short term and the benefits of long-term retirement planning using ISAs, another compelling reason for utilising allowances where possible relates to the additional permitted subscription (APS).

The introduction of the new LISA will provide an additional means for younger adults to save for later life and could be worth considering alongside pensions and other savings vehicles.

Following significant rises in house prices over recent years, the RNRB will go some way to easing the growing concern of IHT planning. Although the introduction of the new allowance has been welcomed by many, it has its drawbacks. Notably the allowance will only apply to wealth tied up in your main residence and it can only be left to direct descendants – i.e. children, grandchildren, step, adopted or foster children. This effectively means that those without children/direct descendants are not entitled to the new allowance.

Additionally, although the new allowance will assist some property owners with IHT planning, house prices are predicted to continue to increase over the same period, so any benefit may be reduced respectively.

As a new allowance, it will be interesting to see how the RNRB pans out. However, providing qualifying criteria are met, the new exemption could save many clients a significant level of IHT.

For more information on any of the above allowance changes, please contact us.

 

 

 

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