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13 tax reforms that will hit your wallet in 2018

A full list of the changes due to take place in April, so you can be prepared

While it may be a new calendar year, the 2018/2019 financial year doesn’t begin until 6 April – and a raft of changes are due to take effect.

Which? explains all the reforms that are likely to affect your finances in the coming tax year.

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Use our jargon-free online tax calculator to send your return direct to HMRC

1. Income tax personal allowance is increasing

The Government is planning to raise the ‘personal allowance’ – the amount of money you can earn before being taxed – to £12,500 by 2020. As part of this push, in April 2018 the allowance rise from £11,500 to £11,850 for basic-rate taxpayers, a saving of £70 a year.

For higher-rate taxpayers, the threshold will increase to £46,350 from £45,000 – a saving of £340 a year. There is no change to the top rate of tax, which applies to earnings above £150,000.

Use our income tax calculator to work out how much you’ll pay in 2018/2019.

Here, Which? Money expert Jenny Ross explains the changes.

 

2. Marriage allowance can be back-dated

If you and your spouse were eligible to claim marriage allowance at any time from April 2015 onwards, but you didn’t claim before the death of your partner, you can now make up to four years of backdated claims for missed payments.

The marriage allowance means individuals can transfer 10% of their personal allowance to their spouse or civil partner – as long as they are not a higher-rate or additional-rate taxpayer. Previously, backdating claims was not possible if your partner died prior to claiming.

3. Dividend tax allowance is being reduced

Those with an income from investments may feel the pinch, as the tax-free dividend allowance will fall from £5,000 to £2,000. If you receive an income from dividends above £2,000, that amount will be subject to tax at 7.5% for basic-rate taxpayers, 32.5% for higher-rate payers and 38.1% for top-rate payers.

It has been estimated that around two-thirds of those with dividend income will be unaffected by this change. But those are affected will experience an average loss of around £315 a year.

4. Mortgage interest tax relief being phased out

April will also see tax relief on mortgage interest payments continue to be curtailed.

Previously, landlords were able to deduct 100% of their mortgage interest when calculating their taxable profit. In April 2017, this was reduced to 75%.

From 6 April 2018, you will only be able to offset 50% of mortgage interest against profits. This will continue to decrease until relief is phased out entirely by 2020.

Instead, landlords will be able to claim a 20% tax credit on their mortgage interest. To learn more about these changes, read our guide to mortgage interest tax relief.

5. Pensions lifetime allowance is on the up

Thanks to higher inflation, there’s good news for those with large pension pots, as the standard lifetime allowance limit will rise to £1.03m from £1m. This is the total value of pensions savings that can be accumulated without a tax recovery charge when a pension or lump sum is taken. Any amount that exceeds this limit will be subject to penal rates of tax.

6. Council tax may see the biggest rise

The 2% cap that all UK councils have been placed under since 2012 will be lifted, enabling all councils to raise council tax by 2.99%. Of these, 152 councils – which include all London boroughs, unitary and metropolitan authorities and county councils – can increase council tax by an additional 3% ‘precept’ to fund social care services.

In real terms, a 5.99% rise to the average annual council tax bill for someone living in a Band D property will mean an increase of £95, but the specific increase will vary area-by-area.

7. Tax-free gains for inheritance tax

It’s good news for those dealing with inheritance tax, as there will be an increase on the ‘main residence nil-rate band’ – the amount you can receive before tax from the property that was the deceased’s main residence.

The amount will rise from £100,000 to £125,000 per person – giving individuals £450,000 and couples £900,000 tax-free inheritance. But this will only apply if the property was passed to a direct descendant i.e child or their spouse, grandchild or spouse, step-child or foster child.

Siblings, nieces, nephews and cousins are not able to benefit from the extra £125,000 individual allowance. This figure set to continue rising each year until 2020.

8. Capital gains tax thresholds rise

Capital gains tax is paid on the profit you make when you sell an asset that has increased in value. This year, the amount of profit individuals can earn tax-free will increase from £11,300 to £11,700, meaning you can make an extra £400 before incurring tax.

Married couples and civil partners can use both partners’ annual exempt amounts, raising their total to a combined £23,400.

Assets held in a trust will also rise from £5,650 to £5,850 of tax-free profits.

9. Junior Isa tax-free savings increase

With no changes set out for other forms of savings, one group that may be better off this year are those with Junior Isas. From April, tax-free savings are set to increase to £4,260, having previously stood at £4,128.

10. Don’t miss the lifetime Isa deadline

Savings can also be made by those who have a Help to Buy Isa. Up until 6 April, you can transfer funds from a Help to Buy Isa to a Lifetime Isa without that amount counting towards your £4,000 annual allowance. This could mean a healthier savings pot to use towards a property if you’re a first time buyer, or in retirement.

11. Car tax increases for diesel cars

From 1 April, all new diesel cars (not vans or commercial vehicles) will go up a VED band if they fail to meet the latest Euro 6 standards in real world testing, meaning more tax will be payable.

So, if you buy a diesel car after 1 April which emits 1-50g/km of CO2 emissions and does not meet the real world Euro 6 standards, you’ll be taxed £25, whereas you would only be taxed £10 at current rates. If your new diesel car emits 191-225g/km of CO2 emissions, however, you’ll be charged £1,700 – £500 more than current rates.

Company car tax is on the up as well, rising to 4% on diesel cars, up from 3%.

The levy will fund a new £220 million Clean Air Fund to support local air quality plans.

12. Self-assessment gets simpler

If you find your tax return stressful, rejoice – HMRC is rolling out a simplified system for some taxpayers. Existing state pensioners who complete a tax return because their state pension is worth more than the annual allowance will be switched to the Simple Assessment system in the 2018-19 tax year.

People who are eligible for Simple Assessment will receive a letter from HMRC showing their income from pay, pensions, state benefits, savings interest and other employee benefits. If the information is correct, you just pay the bill online or by cheque. The deadline will be specified in the letter.

If the information is wrong, you have 60 days to contact HMRC to correct any errors or flag any information that hasn’t been taken into account.

  • Use the Which? tax calculator to submit your tax online

For any payments you do have to make, from 13 January HMRC will stop accepting payments by credit card. This is a result of a new directive that will ban companies from charging a fee when customer use Mastercard or Visa credit cards.

You also won’t be able to pay stamp duty, VAT or corporation tax by personal credit card from 13 January.

13. Stamp duty savings for many first-time buyers

Many first-time buyers will continue to enjoy the stamp duty changes, which came into place in November 2017. Stamp duty has been abolished for all first-time buyers on properties up to £300,000, but stands at 5% on anything above £300,000 if the property is worth between £300,000 and £500,000.

No tax relief is available for properties worth more than £500,000.

Use our stamp duty calculator to find out how much you’ll pay.


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