While we are still waiting to understand how Brexit will affect the UK since the announcement of the 2018 Autumn budget, there are several other changes which could mean many workers are better off, or at least better prepared for retirement. In this article we’ll discuss some of the changes which will affect your finances this year.
How is tax changing?
Hammond’s decision to change the personal allowance this year will mean that UK tax payers will keep £2.8bn in contributions. (Your personal allowance is the amount you can earn before paying income tax.) The changes should mean an extra £155 a year in your pocket if you earn between £12,500 and £50,000, and an extra £566 if you earn between £50,000 and £100,000 . It also means that in 2019 to 2020, there will be nearly one million fewer higher-rate taxpayers than in 2015 to 2016, according to HM Treasury. The changes announced in the budget aren’t restricted to the personal allowance.
National Insurance contributions haven’t been left alone, and annual thresholds will change from April, while the rates will stay the same. The primary threshold has been increased to £8,424, and the upper earnings limit has increased £1,356 (from £45,000 to £46,356). While most will be paying marginally less tax and national insurance contributions, there may be other demands on these funds, as those who contribute to DC workplace pension schemes will need to meet increasing minimum pensions contributions.
Why are auto-enrolment contributions increasing?
Pensions auto-enrolment is designed to encourage saving, creating a framework for workers to build up a ‘pot’ of money to use in retirement. While employees can opt-out of auto-enrolment schemes, the majority haven’t as active membership to occupational pension schemes has increased in five consecutive years and grew from 13.5 million in 2016 to 15.1 million in 2017.
The minimum levels of contributions must be paid to the workplace pension scheme by you and/or your employer. Contributions began at low levels, allowing workers to adjust. However, the government had always planned for these rates to rise. This increase has been planned for quite some time, and as yet no further increases or changes have been announced.
What choices do I have about auto-enrolment?
Both the employer and employee can choose to contribute greater amounts to the pension if they wish. There is no maximum limit on the payments you can make to a pension each tax year, however, limits do apply to the amount of tax relief you can receive. If you’d prefer, you can opt-out of auto-enrolment and decide how you want to prepare for your retirement.
What other changes can we expect this year?
Other changes to come in the 2019/20 tax year include the increase of the Main Residence Nil Rate band (MRNRB) to £325,000. This is an inheritance tax relief, allowing people to pass on more of the value of their estate to their dependants. You can find out more about the MRNRB in our article on using trusts in Estate Planning, which has several scenarios which highlight how this relief can alter the amount liable for inheritance tax.
If you’d like to know more about how your tax payments and NI contributions will change this year, there are many calculators on the gov.uk site which can help. If you want to discuss how the changes from the 2018 Budget will affect your financial planning, you can get in touch with one of our advisers.
When nearing retirement we face the challenge of ensuring our funds will last. Increasing numbers of UK homeowners have been looking for alternative methods to increase their income in retirement and are turning to their property to supplement their pensions.