Swings and roundabouts of income tax changes

The personal allowance for 2019/20 is now £12,500 and the higher rate income tax threshold has increased to £50,000 for those outside Scotland.

The increases are well ahead of inflation – 5.5% for the personal allowance and 7.9% for the higher rate threshold. But are these increases as beneficial as they appear?

Employees

For an employee with earnings of £50,000, the income tax saving compared with 2018/19 is a quite respectable £860. However, main rate employee class 1 NICs are now payable up to the new £50,000 threshold. So for 2019/20, NICs have increased by £340.04 – reducing the net benefit of the personal allowance for such employees.

Then, once the higher workplace pension contributions for 2019/20 are taken into account, there could well be an overall monthly shortfall of just over £42 – not quite what was expected. Most better-off pensioners, however, benefit from the income tax saving without suffering the drawbacks.

Company owner/managers

Company owner/managers can avoid the NIC increase if they withdraw at least some of their profits as dividends. The increased contributions to workplace pensions probably are not directly relevant for them, although clearly they can’t afford to ignore the need to provide for their retirement.

Couples

The higher personal allowance and tax threshold provide more scope for married couples and civil partners to reduce their overall tax liabilities. The increases represent at least another £1,000 of potential further tax savings where one partner is an additional rate taxpayer and the other partner has little or no income, depending on individual circumstances.

Please get in touch if you would like to start planning early in the 2019/20 tax year.