New tax and NI bands – how much better off will you be?

The Chancellor announced a substantial hike in the thresholds for basic rate tax and NI. At first sight these look generous, but looks can be deceiving. How much better off might you be from April 2019?


Headline figures v reality

The Chancellor pulled off a sleight of hand when he announced that tax-free allowances and the basic rate band will be increased significantly from April 2019. He said that he was raising them to a level they weren’t scheduled to reach until April 2020. Very true, but he went on to say that they won’t be increased again until April 2021. Therefore, the resulting tax saving has the appearance of being more generous than it actually is. Plus, there are changes to NI contributions to factor in.

Note. These rate bands will apply to you if you’re resident for tax purposes in England and Wales, even though the Welsh government is partly responsible for deciding its taxrates and bands. If you’re resident in Scotland the increase in personal allowances andthe rate bands apply for unearned income, e.g. savings and dividends, but not for earned income.


Tax savings

Earned income. From 6 April 2019 the tax-free personal allowance will rise from £11,850 to £12,500 and the basic rate band from £34,500 to £37,500. The maximum tax savings for 2019/20 which result if your income is anything other than dividends are £730, £860 and £600 for basic rate, higher rate and additional rate taxpayers respectively (see The next step ).


Dividends. Because the rates of tax for dividends are different, the tax savings are also different. For basic rate, higher rate and additional rate taxpayers the maximum savings are £799, £961 and £750 respectively (see The next step ).


NI extra charges

Where any of your income for 2019/20 will be in cash earnings, i.e. salary or profits, on which NI is payable, you will pay more contributions compared with 2018/19. Where your earned income is from a single source, e.g. salary from one company or profits from one business, and it exceeds the new annual earnings upper earnings limit of £50,000, you’ll pay an extra £413 in NI if you’re an employee or director or £310 if you’re self employed or a partner, compared with 2018/19 (see The next step ). Any extra NI will eat into the tax savings.

Tip. Use our Budget 2018 tax and NI calculator to work out how the changes might affect you for 2019/20 (see The next step ).


Director shareholders

If you’re an employee, self-employed or in partnership you can’t manipulate the type of income you receive and therefore must take whatever the new tax and NI bands throw at you. As a director shareholder you may be in a position to take more or less income as salary or dividends to make the most of the changes.

Tip. For 2019/20 you’ll gain the greatest advantage by taking a salary of £8,632 for the year and dividends that will, taking account of all your other taxable income and reliefs, use all your basic rate band, but not so that your taxable income exceeds £100,000. This would save you £860 tax with no extra NI to pay (see The next step ).


Reproduced with the permission of Indicator – FL Memo Limited. For subscription information call 01233 653500;