The UK’s new tax year: the changes you need to know about

Everything you need to know about the 2018/19 tax year

Rosie Murray-West – Virgin Money Living Mentor

by Rosie Murray-West | Independent Money Mentor

Award-winning personal finance and news journalist

Most of us hold our New Year’s Eve parties on 31 December, but for accountants it is 5 April that gets the champagne corks popping. That’s because 6 April is the beginning of a whole new tax year, with changes to many of your tax thresholds and allowances.

Tax changes might not sound very exciting, but they can have a dramatic effect on your personal finances, for better or for worse. Here’s a rundown of what is changing this new tax year.

Income tax

First, the good news. From 6 April, you can earn more money before you start paying tax on it. Everyone has a personal allowance – an amount of money you can earn before Basic Rate tax kicks in – and this year it will rise from £11,500 to £11,850. (It’s worth noting that earnings are taxed at 20% once you earn in excess of £13,850 in Scotland.) Once you start earning more than £100,000 a year, your personal allowance starts to reduce, and there’s no change to that.

Those people who pay Higher Rate tax, at 40 per cent (or 41% in Scotland), will also get a little more help, since the amount you can earn before Higher Rate tax kicks in is increasing too, from £45,000 to £46,350. Again, it’s slightly different in Scotland where the threshold has increased from £43,000 to £43,430.

ISAs and other savings and investments

There’s a mixed bag for savers and investors as the new tax year comes in, with some increases in allowances, some held steady in spite of inflation, and a painful cost for those who hold dividend-paying stocks outside of ISAs and pensions.

The annual ISA allowance – which is the amount of money you can shelter from the tax man in stocks and shares, cash or innovative finance ISAs – remains at £20,000 a year. Remember, the amount you can put into your lifetime ISA – a savings vehicle for a first home or for retirement – remains at £4,000 a year, and any money you pay into a Lifetime ISA counts towards your overall £20,000 yearly ISA limit. And if you’re saving for children, the allowance for a junior ISA goes up slightly, from £4,128 to £4,260. Find out more about Junior ISAs.

Savvy savers should also be aware of the Personal Savings Allowance. Introduced in 2016, it lets basic rate taxpayers earn up to £1,000 of interest on savings without paying tax on it. For those on higher rate the allowance is set at £500, and additional rate payers aren’t eligible. There are no changes to this in the new tax year.

The biggest change here will be the drop in the amount of dividends you can receive tax free from £5,000 to just £2,000. Dividends are payable from many investments, and self-employed people working through their own limited companies also often pay themselves through dividends so this will have an effect. Above the £2,000 threshold, basic rate taxpayers pay 7.5 per cent tax on their dividends, while higher rate taxpayers pay 32.5 per cent. Investors who receive a lot of dividend income would do well to shift any investments like these into ISAs, where they will pay no tax.

The amount you can pay into your pension and receive tax relief from the government remains at £40,000 a year. However the Lifetime Allowance, which is the amount of pension you are allowed to amass over a lifetime, rises from £1m to £1.03m. 

Benefits and other payments

The benefits system is changing gradually as everyone in the UK who receives working-age benefits is placed into the new Universal Credit system. 

Some changes for everyone in April this year include:

The abolition of Support for Mortgage Interest. This payment, which was given to some homeowners to pay the interest on their mortgages, will cease to exist as a benefit in April. Those who need this support will instead need to apply for a loan to pay the interest, which will be repaid when the house is sold or if circumstances change to make repayment affordable.

Those who are hoping to receive help with childcare will no longer be able to apply for Childcare Vouchers. These vouchers, which are payable out of pre-tax income, will still be available for existing users, but everyone else must use the government’s new tax-free childcare scheme instead. There is more information on the official GOV.UK website

Another benefit change affects those on Housing Benefit moving to Universal Credit. From April 2018 those already on Housing Benefit will continue to receive their award for the first two weeks of their Universal Credit claim. 

And there you have it. Come rain or shine in April, one thing’s a given: you’ll be affected by the new tax year changes one way or another.

Want more info on investing? Find out more about making the most of your ISA allowance.

Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.