the new year brings a number of financial changes that could dent your wallet or boost your savings.
Here’s what you need to know and what you can do to grab the extra cash and avoid the new traps.
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1. Automatic enrolment contributions rise
For someone on an average salary of ₤ 27,000 that will mean the amount they are paying into their pension each year rises from ₤ 169 to ₤ 517.
” The increase coming in April will take the total contribution up to 5% once the employer contribution of 2% and tax relief of 0.6% have been added. Those numbers will increase again in April 2019.”
” While some might be tempted to opt-out due to the extra hit on their disposable income, doing this would mean missing out on the bonus of employer and government contributions, the latter in the form of tax relief,” says Tom Selby, senior analyst at AJ Bell.
At present, the minimum contribution you have to make as an employee is 0.8% of your salary, but that trebles in April to 2.4%.
These increases will mean that, over the next 40 years, someone making just the minimum contribution could build a pension fund of ₤ 219,000, according to AJ Bell.
If you are enrolled in a workplace pension scheme, but only making minimum contributions you will see a significant increase in the amount of your salary that goes into your pension from 6 April 2016.
When you retire, you could avoid this rise by opting out of your workplace pension scheme but you’ll be kicking yourself later if you are left with a meagre pension.
2. State Pension rises
With inflation really starting to take off this rise will help pensioners who are struggling with the high cost of living.
In other pension news, the State Pension will rise by 3% from April. The rise comes courtesy of the triple lock, which means the State Pension must rise each year by the highest of earnings, inflation or 2.5%.
Five mistakes that affect how much State Pension you receive
If you are approaching retirement you can apply for a state pension forecast to find out how much you are likely to get and what you could do to increase your State Pension.
3. Lifetime allowance rises
The Lifetime Allowance is a cap on how much you can build up in your pension pot. Go above the ₤ 1 million limit and you will face hefty tax charges.
Then you’ll be pleased to hear that the Lifetime Allowance will rise next year for the first time since 2010, if you have a sizeable pension pot. Since then the allowance has been gradually cut from ₤ 1.8 million to ₤ 1 million, but in April an inflation-linked rise will see it go up to ₤ 1,030,000.
” It means there is a bit more scope for anyone who is approaching the ₤ 1 million mark and an extra ₤ 7,500 of tax-free cash for anyone who is lucky enough to have reached the allowance,” says Selby.
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4. Dividend allowance falls
You may be able to avoid this additional tax by putting your investments into tax-efficient wrappers such as ISAs or a SIPP so that you can continue to earn tax-free dividend income.
In bad news, the dividend allowance is falling significantly next year. The amount of dividend income you can earn tax-free is being slashed from ₤ 5,000 to ₤ 2,000.
” In pounds and pend, someone who receives ₤ 5,000 in dividends would previously have paid no tax, but next year will be hit with a tax bill of ₤ 225 if they are a basic-rate taxpayer, ₤ 975 for a higher rate taxpayer and a whopping ₤ 1,143 for an additional rate taxpayer,” says Selby.
Any dividend income received above ₤ 2,000 will be taxed at 7.5% if you are a basic-rate taxpayer, 32.5% if you are a higher-rate taxpayer and 38.1% if you are an additional rate taxpayer.
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5. Junior ISA allowance going up
Any child aged under 16 can have a Junior ISA. The money paid in can not be withdrawn until the child turns 18, and whilst it is in the ISA it can grow free from income tax (which children pay at the same rate as adults), dividend tax and capital gains tax.
If you are looking to make a long-term investment like this you may find you get better returns on the stock market.
The main ISA allowance will stay the same at ₤ 20,000 next year, but the Junior ISA allowance will rise from ₤ 4,128 to ₤ 4,260.
Junior ISA rates on cash are better than anything available on traditional savings account– the best rate at present is 3.5% from Coventry Building Society.
6. Increase to inherited ISA allowance
At present, when someone dies their spouse can inherit their ISA holdings without them losing their tax-free status by using the additional permitted subscription system.
When someone dies their ISA will become a ‘continuing ISA’ that won’t accept any more deposits but the holdings will retain their tax-free status and can continue to grow tax-free with the additional permitted subscription valued when the estate is formally closed.
This means that the value of their ISA holdings upon their death is granted as an additional permitted subscription so that the surviving spouse can put the money into ISAs in their own name.
” The changes in April will cure both these headaches, and iron out what has been a potentially expensive and clunky wrinkle in the rules, says Coles.
From next April the government is making a change to allow any growth in the ISA that occurs after death to also be transferred tax-free.
” First, during the administration of the estate, growth in the ISA is being exposed to taxation. Second, the fact that the assets may be growing and the ISA wrapper isn’t, means the surviving spouse may not be able to rewrap all of those assets in an ISA once the administration of the estate is complete.
The ISAs are valued from the date of death, which can cause problems as the ISA holdings continue to grow while the estate is sorted out.
” The administration of a complex estate can take months or even years. During this time, the ISA investments may continue to grow. This causes two headaches,” says Sarah Coles, personal finance analyst at Hargreaves Lansdown.
If Bob dies leaving ₤ 45,000 in ISAs then his wife Doris will be given an additional permitted subscription of ₤ 45,000 for that tax year, on top of her own ISA allowance so she can put ₤ 45,000 of the inheritance straight back into ISAs.
7. Help to Buy/Lifetime transfer deadline
2018 will see an important deadline for people who have built up funds in a Help to Buy ISA and want to move it to a Lifetime ISA (LISA).
, if you had contributed the maximum to a Help to Buy ISA between December 2015 and April 2017 would have ₤ 4,400 saved.. Transfer that into a LISA and contribute the maximum ₤ 4,000 LISA allowance and you would receive a 25% government bonus on the entire amount – ₤ 2,100.
Until 6 April 2018 savers can transfer funds invested in their Help to Buy ISA before April 2017 (when the LISA launched) into a LISA without it counting towards their ₤ 4,000 LISA allowance.
8. Personal Allowance going up
Known as the Personal Allowance, this will mean your income tax bill should fall slightly.
The amount of money you can earn before you start paying income tax will rise in April 2018 from ₤ 11,500 to ₤ 11,850.
9. Marriage allowance rise
In order to do this, you must have an income of less than ₤ 11,850 a year and your spouse must earn less than ₤ 45,000.
If they earn more than you, this allowance allows you to transfer ₤ 1,185 of your Personal Allowance to your spouse.
The Marriage Allowance is increasing by ₤ 35 to ₤ 1,185 in the 2018/19 tax year. The idea with this allowance is it allows married couples to lower their overall tax bill, if one of them earns less than the Personal Allowance.
10. National Living Wage increases
Apprentices will see an increase in their basic wage from ₤ 3.50 to ₤ 3.70. To qualify for this you must be either aged under 19, or over 19 but in the first year of an apprenticeship.
But that will rise to ₤ 5.90 if you are aged 18-20 your boss is legally required to pay you at least ₤ 5.60 an hour. Then your basic wage will rise from ₤ 4.04 to ₤ 4.20, if you are 16-18 years old.
From 1 April 2018, the National Living Wage– the minimum paid to employees aged over 25– will rise from ₤ 7.50 an hour to ₤ 7.83.
The change equates to a ₤ 600 annual pay rise for full-time workers on basic pay.
, if you are beyond the first year of your apprenticeship your minimum hourly wage should be in line with your age based on the rates above.
Pay will also go up for other people with workers aged 21-24 seeing an increase in their basic wage from ₤ 7.05 to ₤ 7.38.