Five tax considerations for 2018

March 14th, 2018

The 2018/19 tax year heralds the introduction of tax changes that might impact on your savings and investments. Whilst despite industry speculation, other rules remain the same.

1) How much you can pay into a pension over your life

The lifetime allowance – which limits how much your total pensions can grow to, without paying tax – is being increased from £1 million to £1,030,000. This 3% rise is a welcome boost for many people. For example, more than 2,500 people exceeded their lifetime allowance over the 2016/17 tax year, triggering an average tax bill of £46,332.

As recently as 2011/12, the lifetime allowance was £1.8 million before it was significantly reduced. This trend is now starting to be reversed, meaning you can build up more in your pension.

2) How much you can pay into a pension, once you start to use it

Since the 2015 pension freedoms were introduced, you can withdraw from your pot whilst still paying in. However, the annual amount you can continue to save, after you take up one of the pension flexibility options, changed last April.

Known as the Money Purchase Annual Allowance, the annual tax-free allowance has reduced from £10,000 a year to just £4,000. In other words, if you’ve started using your pension, but intend to keep paying in, you and your employer can now only save £4,000 a year.

3) The level of tax relief you can receive through pension contributions

In the run-up to recent Budget announcements, rumours of government plans to scale back favourable tax relief rules have circled. However, last November’s Budget once again saw no changes.

This means you can continue to benefit from 20% (if you’re a basic rate taxpayer) or 40% (if you’re a higher rate taxpayer) tax relief on your pension contributions. Over time, this can make a considerable difference.

In the long-term, there are still doubts about the viability of this tax perk. For the 2015/16 tax year, the government spent more than £50 billion on tax relief, which eventually may prove unsustainable.

4) The amount you can receive in dividends

The amount of dividends you can earn from your investments – without paying tax – is being reduced from £5,000 to £2,000 a year.

So if you have investments that generate dividends above £2,000, you’ll have to pay tax at a rate of either 7.5%, 32.5% or 38.1% – depending on your tax position. This doesn’t apply to investments held within an ISA.

5) The amount you can save or invest into an ISA

The ISA allowance for the 2018/19 tax year has been frozen at £20,000, but this still remains a hugely valuable benefit. With no tax to pay on any returns from money held in an ISA wrapper, it makes sense to consider using your new allowance when the tax year begins.

Looking for help minimising tax?

The level of tax you pay can make a huge difference to your overall wealth, so it can really pay off to make sure your savings and investments are as tax-efficient as possible.

This is something a financial adviser can support you with. By reviewing your current plans, they can identify ways of reducing the amount of tax you have to pay.