As the new tax year rolls around, here are the major changes for the 2019-2020 tax year.
The personal allowance, or the amount you can earn tax-free before you start paying income tax, will rise by £650 to £12,500. Pensioners won’t receive a higher personal allowance than other age groups.
You will pay basic rate tax (20%) on your taxable income between £12,500 to £50,000. This means you can earn up to £50,000 before you start paying higher rate tax (40 per cent).
If you earn £100,000 or more, your tax-free personal allowance falls by £1 for every £2 you earn over £100,000.
The additional rate income tax (45 per cent) is charged on earnings over £150,000..
The personal savings allowance
You might be able to reduce your tax bill further if you receive income from savings.
Following the introduction of the new personal savings allowance in April 2016, basic rate taxpayers can now earn £1,000 from savings before they start paying income tax on savings income.
Higher-rate taxpayers will only start paying tax on savings income over £500. These allowances remain unchanged for 2019-2020. There is no savings allowance for additional rate taxpayers.
National insurance – employees
While most people won’t pay income tax on the first £12,500 they earn, employees will need to pay national insurance once they are earning £166 a week.
This is payable at a rate of 12% for earnings between £166 and £962 a week. An extra 2% is applied on earnings above this threshold.
National insurance – self-employed workers
Self-employed workers who make more than £6,365 a year need to pay class 2 national insurance contributions (NICs). These are a flat rate of £3 per week.
Additionally, self-employed workers who make more than £8,632 a year, will pay class 4 contributions of 9% of profits between £8,632 and £50,000 per year, plus 2% of any earnings above that.
The dividend allowance was cut last year, with everyone receiving a £2,000 allowance, down from £5,000 previously. It will remain at £2,000 for the 2019/2020 tax year.
This can be stacked with your personal allowance, so if you don’t have other income you’ll be able to earn £12,850 tax-free in this way.
Once you have breached the allowance, basic rate taxpayers will pay 7.5% tax on dividends and higher rate taxpayers will pay 32.5%. Additional rate taxpayers will be charged 38.1% tax on dividend income.
These changes don’t affect any shares you hold in an Isa or a pension.
Capital Gains Taxes
Lower rate taxpayers pay 10% tax on capital gains and higher and additional rate taxpayers pay 20%.
The only exception is people selling second properties, including buy-to-let investments. Capital gains on these investments will be charged at 18% for basic rate taxpayers, or 28% for higher and additional rate taxpayers.
However, every year you can take advantage of your capital gains tax allowance, so in 2019/2020 you can make £12,000 before you start paying capital gains tax.
There have been no major changes to pension allowances this tax year, so most people will be allowed to pay up to £40,000 into their pension in 2019/2020.
Pensions contributions receive full income tax relief, this means it only costs basic rate taxpayers £80 to save £100 (20 per cent tax relief) while higher rate taxpayers only need to pay £60 to save £100 (40 per cent tax relief).
The lifetime pensions allowance has been increased in line with inflation (consumer price index) for the 2019-2020 tax year by £25,000 and now stands at £1,055,000.
You can once again save £20,000 in an Isa this tax year, where all your earnings will be completely free of tax. This applies to Cash Isas, Stocks and Shares Isas and Innovative Finance Isas and the allowance can be spread between the three types.
If you’re looking to buy a home there are more options. If you have a Help to Buy Isa you can save up to £3,400 in the first year and then £2,400 each year afterwards, but be aware that from the start of December the Help to Buy Isa will not be available for new savers.
For Lifetime Isas you can save £4,000 a year, and this can be used towards the cost of buying a first home or for retirement.
Finally, the Junior Isa allowance is £4,368 for the 2019-2020 tax year, up from £4,260.