Tax year 2019/20 and all that

1. INCOME TAX

In the October 2018 Budget, the Chancellor announced that the personal allowance would rise by £650 in 2019/20 to £12,500. The same Budget increased the basic rate limit to £37,500, making the higher rate threshold £50,000. These figures will be frozen in 2020/21. 

In December 2018, Scotland chose to keep their higher rate threshold figure unchanged in 2019/20 for non-savings, non-dividend income at £43,430, widening the tax gap with the rest of the UK.  

The 0% starting rate band for savings income will stay at £5,000. The £50,000 threshold for the high income child benefit tax charge, the £100,000 threshold for phasing out the personal allowance and the £150,000 starting point for additional rate tax are once again frozen for the coming year, all having been unchanged since their first appearance. The result of this is that the overall tax burden is reduced by £130 for most basic rate taxpayers, but higher rate taxpayers (outside Scotland) will see a more substantial boost. This fades somewhat once the personal allowance is lost, as the table below demonstrates:

UK ex-Scotland Income Tax Changes 

Total Income £	2018/19 £	2019/20 £	Tax Saving £
Less than 11,850	0	0	0
15,000	630	500	+130
20,000	1,630	1,500	+130
30,000	3,630	3,500	+130
40,000	5,630	5,500	+130
50,000	8,360	7,500	+860
75,000	18,360	17,500	+860
100,000	28,360	27,500	+860
125,000	43,100	42,500	+600
150,000	53,100	52,500	+600
200,000	75,600	75,000	+600

Note: Assumes a non-Scottish taxpayer with all income taxed as earned income with personal allowance only (phased out above £100,000) and no high income child benefit tax charge.

The married couple’s allowance (which is only available if at least one partner was born before 6 April 1935) will rise to £8,915 (minimum £3,450). The married couple’s transferable tax allowance rises to £1,250 and will become available to more couples outside Scotland, where the freezing of the higher rate threshold means no increase in the numbers eligible. 

The personal savings allowance levels are unaltered for 2019/20 at £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and nil for additional rate taxpayers. The dividend allowance remains at the £2,000 level it was lowered to in 2018/19. 

The 2019/20 higher rate threshold is 8% above the current year’s (unchanged in Scotland). Important income thresholds, such as the £100,000 threshold for personal allowance tapering, have again remained unaltered.  To minimise tax in the coming tax year, now is an ideal time to review the options. 

 

2. NATIONAL INSURANCE 

The 2019/20 National Insurance Contribution (NIC) thresholds will rise, with a big jump in the upper level of full employee (and self-employed) contributions reflecting the increase in the UK ex-Scotland higher rate threshold (Scotland does not set its own NIC rates and bands). The starting points for employer’s and employee’s NICs rise by £4 a week to £166 a week, while the upper earnings/profits limit will rise to £50,000 (£962 a week).

The result is an effective clawing back of about £340 of the income tax savings for most higher rate taxpaying employees outside Scotland. North of the border, many Scottish higher rate taxpayers will see their tax savings (mainly from the increased personal allowance) more than wiped out by higher NICs. There is no change in the main employer and employee NIC rates for 2019/20 but both could face higher contributions to auto-enrolled pensions (see below).

Class 2 contributions will be £3.00 a week in 2019/20 and will not now disappear during the current parliament, which in theory runs to 2022. The Class 3 voluntary rate will rise by £0.35 to £15.00 a week.

National Insurance is a tax in all but name, a fact which governments of all hues have used to their advantage. Its dual identity can also be used to the taxpayer’s advantage by taking advantage of salary sacrifice as a way of paying pension contributions. Whilst a clampdown on most salary sacrifice arrangements came into operation nearly two years ago, those involving pensions were specifically excluded from attack.

 

3. CAPITAL GAINS TAX 

The capital gains tax (CGT) annual exempt amount for 2019/20 will rise by £300 to £12,000. The 2019 Spring Statement confirmed that “in the coming months” there would be a consultation paper on the tighter rules for lettings relief and the final period private residence exemption, both due to take effect from 2020/21.

The 2019/20 CGT annual exemption is worth up to £3,360. Will your clients be taking advantage of it?

 

4. INHERITANCE TAX 

The inheritance tax (IHT) nil rate band, which has been frozen at £325,000 since April 2009, will remain unchanged until at least April 2021. The residence nil rate band (RNRB), which was introduced in 2017/18, will rise by £25,000 to £150,000 for 2019/20.

Whether the RNRB will then rise, as scheduled, to £175,000 in 2020/21 may be determined by the outcome of the Office of Tax Simplification review of IHT, the second part of which is due imminently – although it did not arrive with the recent Spring Statement. The Office’s first report made clear that the RNRB had been heavily criticised for its complexity by both the general public and tax professionals.

According to Nationwide, the average UK property price has increased by over 39% since the second quarter of 2009.  While the residence nil rate band has helped to counteract this, the fact is that in 2017/18 IHT raised over £5,200m, more than twice the tax revenue it did in 2009/10, despite the introduction of the RNRB.  Estate planning remains essential if the impact of IHT on families is to be minimised.        

 

5. INDIVIDUAL SAVINGS ACCOUNTS 

For 2019/20 the overall ISA investment limit will remain at £20,000, with the Junior ISA (JISA) and Child Trust Fund limits increasing to £4,368 from £4,260.  LISA and Help to Buy ISA limits remain unchanged, although the Help to Buy ISA will cease to be available to new investors from December 2019.

 

6. PENSIONS 

Two important changes to pensions occur on 6 April 2019: 

1. The lifetime allowance will increase from £1.03m to £1.055m. The rise in the lifetime allowance is an inflation-linked increase which should be a yearly feature. However, it will take many years or some serious inflation for the lifetime allowance to regain the £1.8m peak it reached in April 2010.
2. Minimum contributions for automatically enrolled workplace pension schemes will increase sharply for a second successive year. For many employees, the increase is likely to swamp the savings from the adjustments to allowances and tax/NIC bands outlined above. The new limits are set out below, based on the assumptions that the employer pays the minimum required by law and the employee is automatically enrolled: 

Tax year	2018/19	2019/20
Employer Minimum Contribution	2% of Band earnings (£6,032- £46,350)	3% of Band earnings (£6,136- £50,000)
Employee Contribution	3% of Band earnings (£6,032- £46,350)	5% of Band earnings (£6,136- £50,000)
Total Minimum Contribution	5% of Band earnings (£6,032- £46,350)	8% of Band earnings (£6,136 £50,000)

For example, thanks to the higher personal allowance and NIC starting point an employee earning £27,000 a year – about average full-time earnings - will save £154.96 in tax and NICs in 2019/20 but face an extra £331.33 in net auto-enrolment contributions (assuming the employer pays their new minimum of 3%). The end result is a net income drop of nearly £15 a month – enough to be noticeable. Worst hit are those earning £50,000, as they suffer the full impact of the increased contribution band and the increased contribution rate, but lose the higher rate tax relief they would have enjoyed in 2018/19. They could be over £42 a month worse off. 

The second year’s sharp increase in auto-enrolment contributions could come as a shock to many employees, even though the level of contributions is still far too low to provide an adequate pension.

 

7. TAX AVOIDANCE AND EVASION 

HMRC’s anti-avoidance armoury has been strengthened over recent years, with the latest example being the deadline of 5 April to tax outstanding loans under “disguised remuneration schemes”. These were popular in certain employment areas during the early and mid 2000s and had long been at the controversial end of the tax planning spectrum.

There remains a variety of acceptable ways to mitigate tax without straying into territory that brings you to the attention of HMRC.

 

8. BUSINESS TAXES 

The main rate of corporation tax is currently 19% and remains at this level from 1 April 2019. Existing legislation means that the rate is currently set to decline to 17% from 1 April 2020.  

For those running their own business, the low corporation tax rate (compared with the higher and additional rates of income tax) can make trading through a company an appealing option. However, the decision has been complicated by changes to tax rules in recent years. In April 2020 government action will limit the financial benefits of incorporation by extending the scope of the ‘off-payroll working’ tax rules which at present only apply in the public sector. The best choice for any business depends on all the facts and it is important to take more than just today’s tax rules into account when deciding on the appropriate trading vehicle.