Happy New Year? Looking ahead to taxes in 2018/19
5 April has passed with many stockbrokers and IFA’s breathing a sigh of relief as last minute pension contributions, ISA investments and share sales to make use of capital gains tax annual exemptions were processed by the 5 April end of tax year deadline.
What changes does the new 2018/19 tax year bring for us?
Many tax reliefs and allowances increase, notably, the income tax personal allowance from £11,500 up to £11,850 and the capital gains tax annual exemption up from £11,300 to £11,700.
For Scottish tax payers, there is also some additional tax bands, compared to English taxpayers who remain with rates of 20%, 40% and 45%. In Scotland, there is a new 19% band, but only in respect of £2,000 of income while a new 21% band is introduced and the higher rate and additional rate bands both increase by 1% to 41% and 46%. Many on lower incomes will notice modest tax reductions while those on slightly higher incomes and beyond will suffer more income tax.
The big downsides of this tinkering are additional complexity for Scottish tax payers and the costs to HMRC of implementing changes which could easily be tens of millions. It will be interesting to see, in a year or two, when HMRC publish the figures, the amount of additional income tax generated versus the costs of doing so.
Another complication is that the Scottish rates of income tax apply to earnings, pensions and rental income and not to dividends and interest. So while Doctors, Judges and other high earners are caught, those with their own companies can actually reduce their earnings and instead receive dividends from their companies. They would either be completely unaffected or perhaps even be better off as a result of behavioural changes resulting from the higher Scottish rates of income tax. Again, another one where we may be able to glean any behavioural changes when the figures for the Scottish tax take are published.
A final one which, at first glance is a negative but is actually beneficial is that many employees will notice a drop in their take home pay in April. This is because the rate of employees’ pension contribution under auto enrolment is rising from 1% to 3%. The additional contribution is deductible for income tax but nevertheless, after tax net pay will reduce, all other things being equal. The benefit is that when employees retire, there will be more in their pension pot and more available to spend in retirement. Anyone who does not wish to participate in work place pensions can opt out but they have to approach their employer to do this. There may be a short term gain but, in the long run, probably not a good idea bearing in mind that the employer also contributes to these pension schemes for their staff.
Nothing stands still and those of us north of the border can look forward to increasing complexity in our tax system. Many people look back to the olden days when life seemed simpler. They certainly were in the taxation field when, at one stage, we had two rates of income tax: 25% and 40%. Golden years indeed.