Every year the Chancellor of the Exchequer releases a government budget – a document that outlines the state of the UK economy and, more importantly, changes to taxation for the upcoming financial year. It sounds like a pretty boring document but it’s not just for the politically minded and economists. If you’re working, the way we’re taxed directly affects your take-home pay. The most recent budget, which came into effect on 6th April 2019, made some pretty interesting changes that you need to know about.
Here are the three most important takeaways for those of us who are just starting out in our careers.
The personal allowance threshold has increased
The biggest and possibly most exciting change that came into effect this year is that the personal allowance threshold is increasing. Your personal allowance is the amount of tax-free money you can earn per year. Previously, this was set at £11,850 but from 6th April 2019, the tax-free allowance has risen to £12,500 per year which means a little extra money in your pocket each month! It’s not a groundbreaking amount (around £15 extra, once you’ve accounted for deductions like pensions and national insurance) but on an entry-level fashion salary, every little helps!
On a more practical note, the tax code on your payslip will also change from 1185L to 1250L. This should happen automatically but check your next payslip to make sure your coins are stacking right. If, for some reason, your tax code hasn’t changed you’ll need to notify your workplace’s payroll department and also contact HMRC to ensure that you are put onto the right tax code and don’t end up paying unnecessary income tax.
Auto-Enrolment Workplace Pension Contributions are going up
An auto-enrollment workplace pension is a pension scheme that your employer enrols you into. This type of pension scheme offers employees a chance to save a percentage of their annual pre-tax income towards retirement. The employee contribution is then topped up by an additional monthly contribution from your employer. If your employer provides such a scheme, they have to enrol you into the scheme if you are over 22 years old and make more than £10,000 per year.
Before the 6th April 2019, the law required employees registered in an auto-enrolment workplace pension scheme to contribute 3% of their pre-tax income with your employer contributing a further 2% of your annual salary. The 2019/2020 budget increased this amount, requiring employees to contribute 5% of their annual salary and employers to contribute a further 3%.
Whilst the numbers suggest less money in your pocket, you still win overall. If we’re thinking of future gain, increased contributions mean a larger pension pot for when you eventually get to retirement age. In the short term, however, a larger pension contribution coupled with the increased personal allowance means you’re actually paying tax on a smaller percentage of your income.
State Pensions: An Increasingly distant reality
I don’t want to rain on the parade but unfortunately, we won’t be pretty young things forever. The 2019/2020 budget makes this crystal clear. Old age might seem like a distant reality, but it’s never too early to start thinking about long-term financial planning.
The State Pension age is currently set at 65 years old for both men and women. However, the most recent budget announced that this would increase to 66 in October 2020 and then up to 67 over the next 5 years. By the time we reach anywhere near retirement age, it’s likely that state pension age will be even higher or state pensions will have disappeared altogether!
Nevertheless, the 2019/2020 budget did not alter the Tax-Free ISA allowances. ISA stands for Individual Savings Accounts. Their main benefit versus a standard bank savings account is that you can save a certain amount each tax year and not be taxed on your interest payments. This tax-free limit is currently set at £20,000 per year. So you can save any sum up to £20,000 each tax year and not pay tax on any interest. There are many different ISAs available, with different rules and requirements. The one you pick will depend on your savings goals but the tax-free benefits means that you can make your hard earned cash work just that little bit extra.
Personal finance is a tricky thing to master, but it’s incredibly important to know where you’re money is coming from and where it is going. The most recent changes to the budget may not be life-changing, however, understanding the changes can help you take steps to maximise your income.
Of course, good budgeting is the first and most important tool to maximise your income. Otherwise, the save, spend, invest podcast offers easily digestible tips on the basics of personal finance. My personal favourite is Refined Currency, which is a great resource for those of you who really want to learn some interesting personal finance secrets.
Words by Martha Ngatchu