April always brings amendments to the tax system, but this year’s wide-ranging changes feel more like a thorough overhaul than the usual tinkering.
The amount any of us can earn before income tax kicks in invariably rises at the start of the financial year on April 6: the personal allowance is now £10,600, a big jump on last year’s £10,000.
This change will save a basic-rate taxpayer £120 over the next 12 months. It is worth remembering that the personal allowance has been rising much faster than normal under the coalition government – this was a key Liberal Democrat policy before the last election. In 2010-11, the personal allowance was just £6,475 for those up to the age of 65.
This week the higher-rate income tax threshold has increased to £42,385: only earnings over this level are taxed at 40%.
A new income tax relief has come into effect this week: marriage allowance lets husbands, wives or civil partners who are earning less than £10,600 transfer whatever is left of their tax-free personal allowance to their other half. The most that a couple could save is £212 over the course of the year: register your interest in this scheme at this government web page.
Bad debt relief
Of particular interest to peer-to-peer lenders are new rules around bad debts. Any losses resulting from bad debts from April 6 can be deducted from gains when calculating income tax liabilities on P2P returns. It may be that this relief will have to be claimed back through the self-assessment system, however.
A new pension system
The most significant of this week’s changes relate to personal pensions. As of now, anyone aged 55 or over is free to take cash out of their pension to use however they wish.
A quarter of any withdrawal is tax-free, with the rest taxed at the individual’s marginal income tax rate – so 0%, 20%, 40% or 45% depending on what other income they receive in the relevant tax year. It is not yet clear whether there will be a rush to cash in pensions, with people using the money to spend on anything from round-the-world cruises to buy-to-let property. But the new rules will also make it easier to keep a pension invested – and benefiting from any ongoing growth – while taking a regular income to cover living expenses.
It is also now possible for anyone who dies before the age of 75 to transfer any unused pension to a spouse free of income tax.
As usual, the ISA limit has been raised – this time from £15,000 to £15,240. And savers can now pass any ISAs as well as their tax-exempt benefits to their partners when they die, which means this money will remain free of income or capital gains tax.
The old Child Trust Fund system has been assimilated with Junior ISAs, so holders of CTFs can now move their money into a Junior ISA – where there is a wider range of cash and stock market-linked accounts on offer – if they wish.