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New UK tax and pension allowances are kicking in

Tax and pension changes to impact us this April/ Photo by Anna Shvets via Pexels
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10 new rules are kicking in this week, some are welcome, some not. Two experts from Hargreaves Lansdown, highlight what each change could mean to you and how to protect your money from the “clutches of the taxman”

“It’s going to be a horribly taxing year, as a combination of dramatic cuts to some tax allowances and freezes to others takes a nasty toll,” says Sarah Coles, head of personal finance, Hargreaves Lansdown.

However, the personal finance expert does see the odd “glimmer of hope” in some of the new pension rules, but she says, whether the changes bring new opportunities or more horrible headaches, the earlier you can take action in the new tax year, the sooner you can “protect your money from the clutches of the taxman.”

One of the changes does have some benefits, especially for anyone who is unretiring to make ends meet or because they stopped working due to how much tax-free pension investments they could make.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, explains:

“The changes to the annual and lifetime allowance will breathe new life into many people’s retirement planning and give them increased headroom to build their pensions,” she says.

“Those people looking to return to the workforce to rebuild their pensions will welcome the move to increase the limit on how much they can contribute from £4,000 to £10,000 per year. Such an uplift will enable them to significantly boost their pension contributions so they can reinforce their retirement resilience.”

Here the two experts outline each change and how it could impact your financial planning:

  1. Pension annual allowance

“The annual allowance – the total you can contribute to a pension each year while still benefiting from tax relief – has been increased from £40,000 to £60,000. As a note, you can only receive tax relief on an amount worth up to 100% of your earnings. So for instance, if you earned £45,000 per year then that would be the maximum you could contribute and still get tax relief.”

  1. Money purchase annual allowance

“This is the amount you can contribute each year after you’ve flexibly accessed your defined contribution pension. It has been increased from £4,000 a year to £10,000 a year.”

  1. Tapered annual allowance

“The adjusted income level required for the tapered annual allowance to kick in rises from £240,000 to £260,000, and the minimum annual allowance someone with tapering can keep rises from £4,000 to £10,000.”

  1. Pension lifetime allowance

“After years of being frozen at £1,073,100 the lifetime allowance will be abolished. From April 6 the charge that would apply to funds over this amount will be removed.”

  1. State pension

“The new tax year brings a 10.1% rise in the state pension – which will kick in on the first Monday of the new tax year. A full new state pension will be £10,600 per year and a full basic state pension will be £8,122 per year.”

  1. Dividend tax allowance

“The dividend tax allowance falls from £2,000 to £1,000 – and will halve again the following April. This will hit anyone earning dividends on investments held outside of tax wrappers – as soon as they exceed the new smaller allowance. It will also affect anyone who owns their own company and pays themselves in dividends.”

  1. Capital gains tax allowance

“Investors face capital gains tax misery too. This is paid on any profits you make on investments – including stock market investments and second properties. The annual allowance is slashed from £12,300 to £6,000 in April – before being halved to £3,000 the following April.”

  1. Additional rate tax threshold

“The additional rate tax threshold hasn’t moved from £150,000 since it was introduced in 2010, but from 6 April it’ll fall to £125,140.”

  1. Frozen thresholds

“The personal allowance – how much you can earn before paying tax – has been frozen at £12,570, and the higher rate threshold – the point at which you start paying 40%, has stuck at £50,270. The £100,000 level at which the personal allowance starts to be withdrawn has also remained frozen, as has the £50,000 level from which you start to lose child benefit. Inheritance tax thresholds and gift allowances have been frozen, as has the student loan repayment threshold. As a result, over time more people will be pushed over the thresholds to pay more tax.”  

  1. Scottish income tax

“New income tax rates in Scotland mean the higher rate will rise from 41p to 42p and the additional rate from 46p to 47p. The additional rate threshold also falls to £125,140.”

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