Will you get a tax cut in April? How income tax and NI will change


Households and businesses have enough tax changes to keep up, the government believes, and so Chancellor Philip Hammond announced no new tweaks in his Spring Statement today.

But that doesn’t mean that your tax bill won’t change.

Next month the new tax year will herald a series of changes, which will see some workers take home hundreds of pounds more of their earnings.

For example, higher rate taxpayers earning £50,000 a year will get a £236 tax cut next year, while those earning £30,000 will benefit to the tune of £101.

Here we run through the changes due to come into force and how they could affect you. 

From April 6, you can earn £11,850 without paying a penny of tax

From April 6, you can earn £11,850 without paying a penny of tax

From April 6, you can earn £11,850 without paying a penny of tax

You can earn more money before having to pay a penny of income tax

From April 6, the first £11,850 of your earnings will be tax free – unless you earn more than £100,000. This is an increase from £11,500 this year and £11,000 the year before. 

While the new levels were announced last year, they only come into force next month. It is expected that the allowance will rise to £12,000 by 2020 to fulfil a Conservative party pledge. 

Almost all earners benefit from the income tax allowance. The only exception is that it is removed at a rate of £1 for every £2 earned above £100,000, until the allowance is eradicated altogether.

It means that those earning between £100,000 and £123,000 have an effective tax rate of 60 per cent.

Higher earners will get a boost as well

The level at which workers have to start paying a higher rate of income tax is also set to rise next month.

At the moment, everything you earn above £45,001 and below £150,000 is taxed at 40 per cent. This threshold is set to rise to £45,351 in April.

Patricia Mock, tax director at Deloitte, said: ‘The combined personal allowance and higher rate threshold changes will mean that a basic rate taxpayer will increase their post-tax income in 2018/19 by £70 compared to 2017/18 and a higher-rate taxpayer by £340 in 2018/19 compared to 2017/18.

‘Those with income over £123,700 who do not receive a personal allowance will see a tax saving of £200.’

Changes to National Insurance thresholds are also due. Taking into account both national insurance contribution changes and income tax threshold shifts, Ms Mock said a basic rate taxpayer could see their overall tax bill cut by £101 from next year, with higher rate payers seeing a net reduction of £236.

HOW MUCH WILL YOU SAVE AFTER TAX AND NATIONAL INSURANCE CHANGE 
Annual salary Monthly gain Annual gain
£12,000 to £45,000 £8.42 £101.04
£46,000.00 £16.75 £201
£47,000 to £123,000 £19.67 £236.04
£124,000 up £8 £96
Source: This is Money using Deloitte tax calculator from Autumn Budget 2017. Savings from April 2018 

Who are the biggest winners?

The Chancellor claimed last year that this year’s changes would see a ‘typical taxpayer’ pay at least £1,075 less tax than in 2010, adding that a full-time worker on the National Living Wage will take home more than £3,800 extra.

The personal allowance has now risen by over 40 per cent above inflation since 2010, pulling many low-paid workers out of the tax net. The higher rate tax threshold has failed to keep pace with inflation, however, but the Government has promised to lift it to £50,000 by 2020.

This reverses some of what is known as ‘fiscal drag’ whereby static thresholds pull more people into tax brackets as wages or the value of the assets taxed rise over time. 

So more money in our pay packets?

Not necessarily. While the tax changes should see most earners better off, they coincide with changes to workplace pensions, which will wipe out any gains at least in the short and medium term.

From April 6, the amount of money taken from your pay cheque and paid into your workplace pension will rise from a minimum of one per cent to three per cent.

For the average earner, that amounts to £540 every year.

Workers are able to opt out of pension schemes, but this means throwing away potentially hundreds of thousands of pounds at retirement. Pension schemes benefit both from tax relief and free cash from employers, so the clout of money put into schemes by workers is quickly multiplied.

The increase in pension contributions could well wipe out any savings due to lower tax paid. However, in the longer term the increases will mean that workers have more money to retire on. 

The dividend allowance will also fall from April   

The tax-free dividend allowance will be slashed from £5,000 to £2,000 from April. It will mean that anyone who receives dividend payments higher than this amount will have to pay tax. Basic rate taxpayers will hand over 7.5 per cent in tax, higher rate 32.5 per cent and additional rate 38.1 per cent.

The allowance was slashed less than a year after it was introduced by the former Chancellor George Osborne.

Dividend earnings on investments held in Isas are tax free and up to £20,000 a year can now be put in Isas. 

The personal tax allowance 

Under current tax rules, people earning £100,000 or less a year can earn the first £11,500 of their wages income tax free, though National Insurance deductions apply.

Those earning more money, specially over £100,000, see their Personal Allowance reduced from £1 for every £2 of income above £100,000.

People earning £123,000 or above do not have a personal allowance, meaning tax is deducted at the highest rate. 

How much income tax people pay depends on how much someone’s income is above the Personal Allowance and how much of their income falls within each tax band after that. 

People may have a higher Personal Allowance if they claim Marriage Allowance or Blind Person’s Allowance.

From April, the personal allowance is rising to £11,850 before income tax kicks in.

 



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