Spring Statement 2019Member News
In normal times, Philip Hammond’s Spring Statement would be top of the news agenda. However, the chancellor’s update on the nation’s financial health was this year eclipsed by the ongoing political turmoil over Brexit.
With attention focused on the no-deal vote to come later in the day, Mr Hammond kept things as short and sweet as he could. There were reassuring statements about the robustness of the economy and the longer-term outlook, tempered with warnings of the disruption that would follow if a Brexit deal isn’t agreed.
As expected, the chancellor didn’t make any tax changes, as the main budget is now held in the autumn rather than the spring. Instead he stuck to delivering the latest growth forecasts as well as setting out plans for consultations and further investments in infrastructure, technology, skills and housing.
There was also some welcome news for business owners grappling with the introduction of Making Tax Digital. From 1 April, businesses with turnover over £85,000 will be required to keep VAT records digitally and use software to submit their VAT returns. Responding to criticism that businesses haven’t been given enough time to prepare, the chancellor announced a “light touch approach to penalties in the first year of implementation”1
In the absence of any other major tax announcements, we think this is an opportune time to remind you to make the most of the tax allowances that already exist. We detail the key allowances below. Before that, here is a rundown of the key points in the Spring Statement. But remember, these are all predicated on a smooth and orderly exit from the EU.
Mr Hammond’s speech was a mix of positive news, caution on the outlook and a warning to MPs about the risks of a no-deal Brexit. The Office for Budget Responsibility (OBR) cut its growth forecast for 2019 from its previous prediction of 1.6% to 1.2%, the weakest growth rate since 2009. But after that growth is expected to rebound, to 1.4% in 2020 and 1.6% in 2021, 2022 and 20232.
The chancellor took the opportunity to trumpet record levels of employment and wages rising at the fastest pace in a decade. He also highlighted stronger performance in the public finances over recent months. A stronger than expected rise in self-assessed income tax receipts in January, driven by a surge in pay for Britain’s highest earners, helped to bring down government borrowing to £22.8bn in the financial year to date (1.1% of GDP). This is almost £3bn lower than the £25.5bn predicted by the OBR in the October Budget3.The OBR expects the improvement in the public finances to continue. While borrowing is expected to rise to £29.3bn next year, it is then predicted to fall over the next four years4
Prepare for the new tax year
Given the lack of new tax announcements in the Spring Statement it is worth having another check that you are making the most of tax allowances and reliefs that already exist. With just three weeks left until the end of the 2018/19 tax year, time is running out to use what, in some cases, are very generous allowances. Below we explain what action you might want to take, if you haven’t already done so.
Pensions also have an annual allowance. Currently, contributions to pension schemes can be made up to a gross annual limit of £40,000*. However, it is important to bear in mind that the £40,000 annual allowance is tapered for those with adjusted income of over £150,000. The £40,000 allowance goes down by £1 for every £2 of income above £150,000 until it reaches a lower limit of £10,000. Any investment income or growth achieved whilst invested over subsequent years will be free of both income tax and capital gains tax.
The annual allowance isn’t necessarily lost at the end of the tax year, as you may be able to ‘carry forward’ any unused allowance from the previous three years. However, as you can’t get tax relief on more than you earn in any given year, for most people, contributing to a pension on a regular basis is likely to be the best way to benefit from the available tax breaks.
In the current tax year, the first £2,000 of dividend income you receive a year is tax-free. This is on top of the existing personal allowance for income (£11,850 in 2018/19). Dividends over £2,000 are taxed at 7.5% (for basic-rate taxpayers), 32.5% (higher-rate taxpayers), or 38.1% (additional-rate taxpayers).
The personal savings allowance means that basic-rate taxpayers can earn up to £1,000 of interest on savings without having to pay any income tax. Higher-rate taxpayers can earn up to £500 interest tax-free.
Most people wait until death before passing on their wealth through their wills. But, transferring wealth while you are alive can have a transformative effect on your family’s life and reduce an inheritance tax (IHT) liability.
There are a number of annual gift allowances, which wmay be lost if you don’t make use of them before the tax year end.
• You can give away £3,000 each year and this will not
be subject to IHT.
• You can give as many gifts of up to £250 per person
as you want during a tax year, as long as you haven’t
used another exemption on the same person.
• Surplus income can also be gifted provided you can
maintain your standard of living after making the gift.
2019/20 tax year changes
There were no tax changes in the Spring Statement. However, some significant tax changes announced in previous Budgets could affect you when the new 2019/20 tax year begins on 6 April.
The personal allowance – the amount you can earn before paying income tax – will rise to £12,500 on 6 April 2019. The threshold for the start of the higher-rate 40% tax band will rise from £46,350 currently, up to £50,000 in 2019/20.
While this will be welcome for many taxpayers, it will provide little benefit to higher earners who start to lose their personal allowance when they earn over £100,000. The personal allowance is reduced by £1 for every £2 of income above £100,000. This means your allowance is zero if your income exceeds £125,000, up only slightly from £123,700 in 2018/19.
The annual allowance – the limit on the amount of pension contributions that can be made each year and qualify for tax relief – remains at £40,000 in 2019/20, but note that this may be lower depending on your individual circumstances.
The lifetime allowance will increase in line with inflation to £1,055,000 (from £1,030,000 in the 2018/19 tax year). This allowance is the maximum amount of pension savings you can amass over a lifetime without incurring a
People who reached State Pension age before April 2016 receive the basic State Pension which will be increased by £3.25 a week to £129.20 a week (£125.95 in 2018/19).
Those who reached State Pension age after April 2016 will receive the single-tier state pension. If you are entitled to the full single-tier state pension, your weekly payments will increase from £164.35 to £168.60, an increase of £4.25 a week.
Capital gains tax
The annual tax-free allowance for capital gains tax, known as the ‘annual exempt amount’, will increase to £12,000.
Landlords used to be able to claim tax relief on 100% of mortgage interest costs at their marginal rate (40% for higher-rate taxpayers; 45% for additional-rate taxpayers). That meant all landlords only paid tax on the difference
between their expenses and income, their profit.
That changed in April 2017. In the 2018/19 tax year, landlords can only claim relief at their marginal rate on 50% of mortgage interest costs. On the remaining 50%, tax relief is restricted to the basic rate of income tax of 20%.
In the 2019/20 tax year, landlords will only be able to claim relief at their marginal rate on 25% of mortgage interest costs with the remainder qualifying for basic rate tax relief.
If you own a buy-to-let property, these changes may make it a less appealing investment. Brewin Dolphin can help you explore alternatives to buy-to-let that are more liquid and tax-efficient.
How we can help
The use of allowances is a deceptively complex area, and professional advice can help you to maximise the potential of the various tax savings on offer. Brewin Dolphin’s financial planners can help you to build a tax-efficient financial plan that ensures you are making the most of the reliefs and allowances available to maximise returns on pensions, savings and other investments.
Our experts can also introduce you to tax specialists where appropriate.