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A new tax year, new tax rules

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25 April 2018

The start of a new tax year inevitably brings some new tax rules. We have set out some of the key changes below.

DIVIDEND ALLOWANCE REDUCED TO £2,000

New rates for the taxation of dividends were introduced in April 2016 along with a tax-free Dividend Allowance. The allowance meant that no income tax was due on the first £5,000 of dividend income received.

Just two years on and the government have decided that they were a little too generous, so from April 2018 this tax-free amount reduces to £2,000. Depending on the rate at which you pay tax, this change could result in additional tax of between £225 and £1,143 for the 2018/19 tax year.

A remuneration planning review for the new tax year may therefore be needed to take into account this change and ensure reliefs and allowances are maximised as far as possible. For owner managed business, up to £19,850 could be taken home tax-free (and double that for couples) in 2018/19 with the right combination of salary, interest and dividends.

OTHER ALLOWANCES

From April 2018, the personal allowance increases to £11,850 (£11,500 in 2017/18) and the basic rate tax band increases to £34,500 (£33,500 2017/18). The capital gains tax annual exemption also increases to £11,700 (£11,300 2017/18).

FINANCE COST RESTRICTIONS FOR RESIDENTIAL PROPERTIES

The phased in restrictions on finance costs on residential property buy-to-lets continues for 2018/19. 50% of interest paid will be fully deductible against property income, with the other 50% restricted to basic rate tax relief compared to 75% and 25% respectively in 2017/18.

Higher and additional rate landlords will be the main individuals affected by these rules, but in some cases basic rate taxpayers could also be tipped into the higher rate band. The calculation is not straightforward and a review of your effective tax rate taking into account the full effect of the new rules would be advisable. There are options which can be explored to help minimise and in some cases mitigate these rules which we would be happy to advise on.

RESIDENCE NIL RATE BAND

April 2017 introduced an additional nil-rate band, which allows for a residence to be passed on death to a direct descendant without an inheritance tax charge. This was set at £100,000 in April 2017 and rises to £125,000 for deaths on or after 6 April 2018. By 2020, the nil-rate band available will be £175,000.

The nil-rate band will be tapered away where the net value of the estate is more than £2 million. This band is in addition to the £325,000 nil-rate band for inheritance tax. A couple could, therefore, now have an estate of up to £900,000 before paying any inheritance tax (and £1 million by 2020). 

CLASS 2 NATIONAL INSURANCE CONTRIBUTIONS (NIC)

From April 2018, Class 2 NIC was expected to be abolished, however, the Autumn Budget announced that this will now be delayed until April 2019. 

TERMINATION PAYMENTS

From April 2018, all payments in lieu of notice (PILON) on termination of an employment will be fully taxable. Previously, only contractual PILONs were subject to tax. Taxable termination payments will also be subject to employer's NIC from April 2019 (pushed back from April 2018, along with the above proposals).

EIS/SEIS/VCT INVESTMENTS

The Autumn Budget also announced some changes for investors into companies under the Enterprise Investment Scheme (EIS), Seed EIS (SEIS) and Venture Capital Trust (VCT) arrangements. 

Income and capital gains tax reliefs associated with these investments will be withdrawn for investments in companies with a low ‘risk-to-capital’ unless the following two conditions are met: 

  1. the issuing company must have plans to grow and develop its trade in the long term; and 
  2. the investment must carry a significant risk the investor will lose more capital than they gain as a return. The rules apply for investments made on, or after, 15 March 2018.