Unlike me, you’re probably not excited by the new tax year. However, this is a great opportunity to reassess your financial situation and then reward yourself with chocolate. Every April 6th, your tax allowances are adjusted and maximum contributions reset.
In this post, I’ll explain what’s happening this year with tax allowances, pensions, and ISAs.
If you’re still under 40, you can use part of your allowance for a Lifetime ISA (LISA). This helps you either buy your first home or put aside money for retirement. Save the maximum of £4,000 this year and the Government tops it up to £5,000.
Those of you who are even younger (0-18) can pop £4,620 into a Junior ISA.
You can’t carry forward any unused ISA allowances to future years, so work out a plan now if you want to maximise the tax advantages before 5th April 2020.
Unlike ISAs, you’re allowed to carry forward unused pension allowances for up to 3 years. Usually, you can contribute up to £40,000 or the value of your salary (whichever is lower) to your pension pot each year. You then receive tax relief on that amount. If you’re a basic-rate taxpayer, a £3,000 contribution becomes £3,600. The Government essentially refunds the tax you’ve paid on that income. Higher- and additional-rate taxpayers get relief at 40% and 45% respectively, although you often need to reclaim this through your self-assessment return.
If you’re an employee who’s likely to move into a higher tax bracket next year, it could be worth deferring your pension contributions to ensure you benefit from the extra relief. For more information on carrying forward your pension allowance, take a look at the Pensions Advisory Service guide.
Anyone who’s self-employed through a limited company can normally make unlimited pension contributions from the business, regardless of how much you pay yourself as a salary. You mustn’t, however, exceed your turnover from the year. Although you don’t get tax relief, it’s tax deductible. Corporation tax isn’t payable on the amount you put in your pension.
Even if you’re not currently earning, you can still contribute £2,880 into a pension. Tax relief then brings this amount up to £3,600.
Tax Changes for 2019-20
If you’re wondering how to find some spare cash to invest in your ISA or pension, you might have a pleasant surprise. In the year 2019-20, the personal allowance – the amount you can earn tax-free – rises from £11,850 to £12,500. The higher rate threshold above which you pay 40% is also increasing to £50,000. Some workers could see an extra £500 in their bank account over the year.
The National Insurance (NI) threshold has nudged up, too. You can now earn £8,632 (up from £8,424) before you need to make NI contributions of 12%. Once you earn more than £50,000, you pay 2% above that amount. This threshold has risen from £46,500, so anyone earning a salary between those two amounts will see a larger NI deduction from their pay packet.
Try the Which? tax calculator to see how much you should be paying. Calculators are available for previous years, too, to help you make a comparison. Which? also offers a comprehensive guide on all the personal tax rates for 2019-20.
Depending on your salary, then, you might have some extra money this year. Have a think about whether you can make it work harder for you by using some of the ISA and pension tax incentives outlined above. Even if you invested just £25 each month, this could grow to £3,600 over 10 years1 Don’t forget to pay yourself first.
This post is for information only and does not constitute financial advice.
- Based on a stocks & shares ISA with a return of 5%. This calculation includes annual charges of 1.25% but does not take account of inflation. [↩]