Tax: some big changes are on the way

April 6 will see some significant changes that will affect the savings and dividends income of most UK taxpayers. The reforms cover an increase in personal allowance; the introduction of the new personal savings allowance; and changes in dividend taxation.

The changes aren’t doom and gloom for everyone, though, as many people will pay less tax. However, the tax system could potentially become more complicated in the process.

Another welcome increase in the Personal Allowance

The tax-free personal allowance amount is set to increase from £10,600 (2015-16) to £11,000 (2016-17). And with that comes an increase in the higher rate tax band to £43,000* in 2016- 17. Good news if you earn less than £100k per year.

Say hello to the new Personal Savings Allowance

A new Personal Savings Allowance is being introduced that will give taxpayers (both basic and higher rate) a savings income tax-free allowance.  This new savings initiative will give basic and higher rate taxpayers a tax-free allowance specifically for savings income – so if you have savings accounts, you’ll be earning more interest from April.

Unfortunately, additional rate taxpayers won’t receive the allowance, but basic rate taxpayers will receive an annual allowance of £1,000, and higher rate taxpayers will get £500. Earnings above those limits will be subject to tax on the amount exceeding the allowance.  And people with annual income of less than £17,000 won’t pay any tax on their savings interest because of the personal allowance increase and the introduction of the new personal savings allowance.

From April 6 banks will pay gross interest, and this is where it gets a bit tricky as HMRC have yet to confirm how the tax will be applied if the limits are exceeded.  However, it’s anticipated that for those paying through PAYE that it will be collected automatically, and for everyone else it’s most likely to be the Self Assessment route.

Not so welcome changes to dividend taxation?

You may remember our post from last year ‘Dividend tax increase may impact you sooner than you think’, well that sooner has arrived.

In summary, from April 6 the first £5,000 of annual dividend income will be tax-free for all. Amounts above £5,000 will be taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers, and 38.1% for additional rate taxpayers.

That’s a significant jump from current tax levels which are zero for basic-rate, 25% for higher-rate, and 30.56% for additional rate taxpayers. However, with the introduction of £5,000 allowance, it will depend on income levels and your tax band as to how much of an impact this will have on you.

Additionally, the tax won’t be deducted at source, which means that taxpayers will use Self Assessment to work out what’s owed to HMRC. One more administrative task for you to consider.

Who will these tax changes affect most?

And these aren’t the only changes

  • The lifetime pension allowance will be cut from April, going down from £1.25m to £1m – meaning that pensions over £1m will now attract a hefty 55% tax bill
  • As we reported in our post ‘HMRC: How to spot an online fraudster’ Personal Tax Accounts will be rolled out during the coming months
  • There will be 3% increase in stamp duty on buying a second or additional property
  • From 2017, higher and additional rate taxpayers who are landlords won’t be able to deduct mortgage interest from their taxable profits

What does this all mean for you?

Hopefully, you’ll be lucky, and the changes will have a positive impact on you. However, the bottom line is that it will all depend on your personal circumstances – how much you have in savings and dividend income; whether you’re currently a landlord; and whether you’ll be buying a second or additional property this year.

If you’d like help in working it all out, then get in touch on 0141 345 2355 or email stephen.usher@keypp.co.uk.

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