Personal Income Tax
Tax rates and allowances (Table A)
For the tax year 2018/19, the main tax-free personal allowance is increased to £11,850 (up from £11,500), and the basic rate of tax applies – in England, Wales and Northern Ireland – to the next £34,500 of income (up from £33,500). This means that the threshold for 40% tax will be £46,350 for 2018/19 (up from £45,000). The level of income at which personal allowances are withdrawn remains £100,000; the withdrawal of £1 for every £2 of income means that there is an effective marginal rate of tax of 60% in the band of income up to £123,700 in 2018/19, above which the taxpayer will have no personal allowance.
The Scottish Parliament has the power to set different tax rates and thresholds for Scottish taxpayers, and the details are yet to be confirmed for 2018/19. 2017/18 was the first year in which the tax thresholds were different, with the 40% tax rate applying at a lower level (£43,000 rather than £45,000) in Scotland.
As announced in the March 2017 Budget, the Dividend Allowance will be reduced from £5,000 to £2,000 for 2018/19. Dividend income of up to this amount is not taxed, but any excess is charged at 7.5%, 32.5% or 38.1%, depending on whether the taxpayer is within the basic rate, higher rate or additional rate bands. Reducing the Dividend Allowance will raise nearly £1 billion per year by the end of this Parliament.
There were no other significant changes to Income Tax rates and allowances, which are now extremely complicated (see the Table). An individual’s total tax liability on any given amount of income will vary considerably depending on the components of that income (for example, salary, profits, rent, interest, dividends). On a simple salary of £46,350, the Income Tax payable will be £340 less in 2018/19 than in 2017/18. However, the upper limit for 12% National Insurance also increases, so there will be an extra employee’s NIC bill of about £100 to offset the tax reduction.
There is a limited relief available where one member of a married couple or civil partnership has unused personal allowance and the other is a basic rate taxpayer. 10% of the allowance can be transferred to the taxpaying spouse or partner, saving tax at up to 20% (£237 in 2018/19) for the recipient. Until now, it has only been possible for the transferring spouse to make the claim, which meant that the saving was denied if the claim had not been made before the person died. This anomaly has been corrected: claims made on behalf of a deceased person will be permitted with effect from 29 November 2017, and can be backdated by up to four years.