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Budget 2017: what’s coming in the 2017-18 tax year?

We round up how the Budget will be affecting your finances

This year’s Spring Budget, in which the Chancellor of the Exchequer announces key changes affecting our finances in the upcoming tax year and beyond, takes place on 8 March 2017.

Here, we round up the pre-announced changes for the 2017/18 tax year, expected to be confirmed by the Chancellor in his Budget speech.

Lifetime Isa

The Lifetime Isa was revealed in last year’s Budget – and is a new way for people to save up to buy a home or for their retirement.

This new tax-free savings product will become available to those aged between 18 and 39 from 6 April 2017.

For every £4 saved, the government will add £1 towards the purchase of their first home, or towards their retirement savings. They can save a maximum of £4,000 a year, with a maximum annual bonus of £1,000 from the government.

However, if they withdraw money before turning 60 without using it to buy their first property, they may face a penalty. See our lifetime Isa video guide for all of the essential facts.

The annual Isa allowance, which can be invested in cash, stocks and shares or a mixture of both, jumps up to £20,000 in 2017/18.

Inheritance tax

In 2017/18, the amount you can pass on to your loved ones free from inheritance tax (IHT) will increase significantly – provided what you pass on includes your main home.

A new allowance, called the ‘main residence nil-rate band’ will be introduced, starting at £100,000 on 6 April 2017 and increasing by £25,000 each tax year until it reaches £175,000 in 2020/21.

The new allowance is in addition to the existing £325,000 IHT allowance each person has. This means, where someone is leaving a property to their children or grandchildren, the amount they can pass on IHT-free will be:

  • £425,000 in 2017/18
  • £450,000 in 2018/19
  • £475,000 in 2019/20
  • and £500,000 in 2020/21.

Married couples and civil partners can claim any unused inheritance tax allowance from their spouse or partner – so a couple with a property to leave get an effective double allowance between them. This means that, over the next four year, the amount a couple can pass on IHT-free is:

  • £850,000 in 2017/18
  • £900,000 in 2018/19
  • £950,000 in 2019/20
  • and £1m in 2020/21.

This measure was first announced in the 2015 Spring Budget.

Find out more: inheritance tax thresholds – calculate how much tax may be due on your estate

Income tax

The personal allowance  – the amount you can earn before you pay income tax – will rise to £11,500 in 2017/18. The government estimates this will take around 1.3 million people out of paying income tax altogether.

Meanwhile, the amount you can earn before you pay higher-rate (40%) tax is also shifting, as detailed in the table below.

2016/17 2017/18
Personal allowance £11,000 £11,500
Basic-rate threshold (20%) £11,001 to £43,000 £11,501 to £45,000
Higher-rate threshold (40%) £43,001 to £150,000 £45,001 to £150,000
Additional-rate threshold (45%) £150,000+ £150,000+

Find out more: tax-free income – learn about other available allowances

Buy-to-let tax relief

The amount of tax relief that buy-to-let landlords can claim on mortgage interest will be tapered from the start of the upcoming tax year.

Currently, landlords can deduct the cost of the mortgage interest they pay from their rental income when they calculate their taxable profits. The table below shows how it currently works for a higher-rate taxpayer.

Amount of rental income earned Amount of mortgage interest paid  Taxable profit Tax at 40% Profit after tax
 £5,000  £3,000 £2,000 £800 £1,200

However, landlords will face significantly larger tax bills over the next four years, as they’ll steadily lose the ability to deduct mortgage interest from their rental earnings. From 6 April this year, they’ll only be able to deduct 75%, reducing to nothing by 2020/21.

Instead, a new tax credit of 20% can be claimed on the amount of mortgage interest a landlord pays.

Using the same scenario above for a higher-rate taxpayer earning £5,000 in rental income a year, see how this could increase a landlord’s tax bill.

Tax year  Mortgage interest Gross profit % of interest deducted Taxable interest Total profit taxable Tax at 40% 20% tax credit  Total tax paid Profit after tax
2017/18 £3,000 £2,000 75% £750 £2,750 £1,100 -£150 £950 £1,050
2018/19 £3,000 £2,000 50% £1,500 £3,500 £1,400 -£300 £1,100 £900
2019/20 £3,000 £2,000 25% £2,250 £4,250 £1,700 -£450 £1,250 £750
2020/21 £3,000 £2,000 0% £3,000 £5,000 £2,000 -£600 £1,400 £600

 

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