Uproar at 11 lost days.
As a new tax year starts I thought I’d review the main tax changes that the new year introduces. But first a little tax year related trivia.
Why does our tax year start on the 6th of April and not the 1st of January? (I rather like it actually – who wants to be worrying about unused ISA allowances in the middle of the Christmas holidays?) We have to go back to 1582 when Pope Gregory XIII decreed a change from the Julian calendar (named after Julius Caesar) to the Gregorian calendar (named after…who else?).
If we were to look at it today the Julian calendar would appear familiar to us; it has twelve months, eleven of which have 30 or 31 days and a 28-day February with a 29th day every four years. The leap years mean that each year, averaged over four years, is 365.25 days long. But that is a little bit too long, since the astronomical year is 365.24219 days long – not much of a difference you’d think, but it means the calendar gains about 11½ minutes every year. Between Julius Caesar introducing his calendar and Pope Gregory’s tenure in the 1500s this discrepancy meant the Julian calendar was some 10 days out of synch with astronomical time. This caused problems with the setting of Easter which the Papal decree corrected by dropping 10 days in 1582 and reducing the number of leap years to 97 in every 400 years. If a centurial year is divisible by 100 it is not a leap year, unless it is also divisible by 400 (so 1600 was a leap year but 1700, 1800 and 1900 were not). However, belligerent Britain ignored the Pope’s decree and carried on using the Julian calendar.
New Year’s Day in Britain under the Julian calendar was the 25th of March, which is Lady Day, the first of the four main Christian religious holidays. (When you visit our offices on King William Street, cross the road and enter Post Office Court where you will find this plaque, which records a financial institution moving on Lady Day). In England and Ireland these ‘quarter days’ were used as days on which debts and accounts had to be settled. So the 25th of March was both New Year’s Day and the first day of the British tax year.
Having ignored the Papal decree, by 1752 Britain was 11 days out of synch with the rest of Europe – 1st January 1752 in Britain was 12th January across the Channel – and the British finally accepted they would have to align calendars and move New Year’s Day to the 1st of January. To achieve this, 1751 was a short year, 25th March to 31st December, and 1752 began on 1st January (but don’t forget the eleven days haven’t been fixed yet). To bring us into line the eleven days were simply dropped from the calendar; Wednesday the 2nd of September 1752 was followed by Thursday the 14th September. The British people wrongly believed they were being ‘robbed’ of 11 days whilst still being expected to pay 365 days’ worth of tax. The Treasury decided to keep the 1751/52 tax year (as we now record our tax years) at 365 days and moved the 1752/53 year forward 11 days from the 25th of March to the 5th of April.
The sharp-eyed will have spotted that there is still one day’s difference. This is explained by 1800 not being a leap year in the Gregorian calendar (remember the ‘divisible by 400’ rule), so the tax year start was moved on again to the 6th of April. In 1900 this practice was stopped and we have had the 6th of April as the start of our tax year ever since.
So, following that rather long preamble, back to those tax changes.
The personal income tax allowance increases this year to £11,850 from £11,500. That’s another £350 a year on which you pay no tax. And the earnings required to reach the higher rate tax threshold increases from £45,000 to £46,350…unless you live in Scotland where this year brings some bigger changes.
For residents of Scotland, a starter rate of 19% applies on the first £2,000 of income above the personal allowance. The basic rate stays at 20% but only on the next £10,150. A new intermediate rate of 21% applies on the next £19,430 and the higher rate increases to 41% on income over £43,430. So the Scottish higher rate kicks in at incomes £2,920 lower than the rest of the UK and at a rate that is 1% higher. The additional rate for earnings over £150,000 is 46% in Scotland against 45% elsewhere in the UK.
So what does this mean in practice? All other exemptions and allowances aside, a Scotland resident worker earning up to £26,000 (reportedly the average wage in Scotland) will pay less tax than the equivalent England, Wales or Northern Ireland residents. Anyone in Scotland earning more than £26,000 will pay more tax than their other UK compatriots. At the threshold where an England resident becomes a higher rate taxpayer (£46,351) his Scotland resident counterpart will already be a higher rate taxpayer, paying £788 more in tax.
The Residence Nil Rate Band (which I discussed right back in my first Technical Note) sees its first increase. Go back and read it by all means, but in brief it means that those who pass on their main residence to direct linear descendants will have an additional £125,000 each of Inheritance Tax nil rate band on top of the main £325,000, so a total for a married couple of £900,000 – though the RNRB is tapered away for estates over £2m.
The pension Lifetime Allowance sees its first increase since 2009, when it increased from £1.75m to £1.8m. The many reductions since then resulted in a Lifetime Allowance of £1m for the last two years, but it now goes up to £1,030,000.
The Capital Gains Tax exemption increases to £11,700 (from £11,300) for individuals and up to £5,850 from £5,650 for trusts.
Those are the main increases. There are many ‘no changes’, such as the ISA subscription that remains at £20,000, although the Junior ISA subscription increases to £4,260 from £4,218. The pension Annual Allowance (£40,000) remains un-changed, as does Entrepreneurs Relief (£10m), the IHT annual gifts allowance (£3,000, which hasn’t changed since 1981) the £3,600 limit on pension contributions where there are no relevant earnings (another that hasn’t changed for many years) and National Insurance rates (though the bandings change in line with income tax bands). There are plenty more ‘no changes’, but I’ll leave it at that for now.
What’s gone down? Well the Dividend Allowance, on which you pay no tax on dividends has gone down from £5,000 to £2,000, quite a big shift and one I discussed in TN5. And finally, mortgage interest relief on buy-to-let properties. From this year only 50% of mortgage interest payments will be deductible as a business expense and by 2020 the option will be entirely removed and replaced with a 20% tax credit.
I may have (no, actually, I definitely will have) missed some of the more obscure tax changes, but you can’t blame me. Something else that has gone up inexorably is the UK tax code, from some 4,998 pages in 1997 to well in excess of 20,000 now! Oh, and Happy New Year.
Philip Chandler FPFS, CFPTM, Chartered MCSI
Chair of Aspinalls Technical and Investment Committee