Tax year 2017-18: Five changes you need to know about
The new 2017-18 tax year started on 6 April, bringing with it several changes which could affect your finances. We look at five of the most important new rules and allowances that have come into effect, and explain the impact they could have on you.
What you'll learn:Click to toggle accordion What you'll learn:
How your annual ISA allowance is more generous than it's ever been.
How changes to the pension Money Purchase Annual Allowance could affect you.
Why you may now be able to pass on more of your estate free of inheritance tax (IHT).
The start of the new tax year is an ideal time to swot up on any new allowances and changes which could affect your personal finances.
Remember, however, that tax rules can and do change and their effect on you depends on your individual circumstances, which can also alter over time. Here are five changes that have come into force at the start of the 2017-18 tax year which you should be aware of.
1. You can invest more than ever before into tax-efficient ISAs
The annual ISA allowance for the 2016-17 tax year was £15,240, but this tax year (2017-18) the allowance has increased to a much more generous £20,000, with any returns protected from income tax and capital gains tax.
You can invest your ISA allowance either in cash, or investments, or Innovative Finance ISAs, which invest in peer-to-peer lending, or you can put up to £4,000 of your allowance into the new Lifetime ISA, which is available to those aged from 18 up to 40, which are designed to help those looking to get on the property ladder, save for retirement, or both. For example, if you pay into a cash ISA and an investment ISA already, you can also have a LISA, but you can’t exceed the £20,000 annual allowance and the £4,000 lifetime allowance sub-limit.
You can only pay into one cash ISA, one investment ISA, one Innovative Finance ISA and one Lifetime ISA this tax year. Remember that investments can fall in value as well as rise, and you could get back less than you put in.
2. There’s a new type of ISA available
As mentioned above, the new Lifetime ISA (LISA) has been launched to encourage people aged under 40 to save for a home or their retirement.
Individuals can save up to £4,000 a year into a LISA, which will be supplemented by a government bonus of 25%, up to a maximum of £1,000 a year, up until you reach the age of 50. LISAs can hold cash, stocks and shares, qualifying investments, or a combination of both.
You’ll be able to use funds held in a LISA after 12 months to buy a first home valued up to £450,000. Alternatively, after your 60th birthday you’ll be able to take out all your savings from your LISA tax-free, for use in retirement. If you take any money from your LISA at any other time and don’t use these funds to buy a property, you’ll have to pay back the government bonus and a withdrawal charge of 5% of the amount you’ve taken out. However, this withdrawal charge won’t apply if you decide to cash in your account during the first 12 months after its launch.
You can have any combination of different ISA types and a LISA at the same time. For example, if you have a cash ISA and an investment ISA, you can also have a LISA. However, you can’t pay in more than the annual £20,000 ISA allowance across all your ISAs.
3. The amount you can contribute to your pension once you’ve begun accessing your savings has been reduced
The Money Purchase Annual Allowance (MPAA) has been reduced. The MPAA restricts the amount that can be paid into pensions by those who’ve drawn down personal pensions beyond their tax-free lump sums. The aim of reducing the allowance is to restrict people ‘recycling’ money back into their pensions for tax relief purposes. The allowance was £10,000 in the 2016-17 tax year, but has fallen to £4,000 for the current 2017-18 tax year.
4. You may be able to pass on more of your estate free of inheritance tax (IHT) when you die
The current threshold at which your estate becomes potentially liable for inheritance tax (IHT) at 40% is £325,000. This tax year (2017-18), however, everyone will be entitled to an additional £100,000 tax-free allowance which can be used against the value of their home.
This will increase annually to reach £175,000 by 2020-21, but may only be used when you leave your home to your children or grandchildren. If you’re unsure about IHT planning, seek professional independent financial advice. Bear in mind that tax rules can and do change over time, and their effect on you will depend on your individual circumstances, which can also change.
5. The amount of tax relief that is available for interest on buy-to-let mortgages is reducing
If you own a property which you let out, changes to buy-to-let tax rules, which are being phased in from the start of the new tax year, will restrict the amount of mortgage interest you can deduct when calculating rental profits.
Previously, landlords could claim tax relief at their marginal rate, so either 20%, 40% or 45% depending on whether they’re a basic, higher, or additional rate taxpayer, but this will reduce gradually so that by 2020, landlords will only be able to claim basic rate tax relief.
Please bear in mind that this article is for general information purposes only. If you’re unsure about any aspect of tax planning, seek professional independent advice. Remember, the value of investments can fall as well as rise and you may get back less than you invest.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.
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