Personal allowance, tax bands and rates
For those born after 5 April 1938 the personal allowance is currently £10,600 to 5th April 2016. Those born before 6 April 1938 have a slightly higher allowance. Legislation has already been enacted to increase the personal allowance to £11,000 in 2016/17. From 2016/17 onwards one personal allowance will apply regardless of age and this will be £11,500.
Note: There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000 which is £1 for every £2 of income above £100,000. For 2016/17 there is no personal allowance where adjusted net income exceeds £122,000.
The basic rate of tax is currently 20% which applies to the first £31,785 over the personal allowance, meaning the threshold at which the 40% band applies is £42,385 for those who are entitled to the full basic personal allowance.
Legislation has already been enacted to increase the basic rate limit to £32,000 for 2016/17. The higher rate threshold will therefore rise to £43,000 in 2016/17 for those entitled to the full personal allowance.
The additional rate of tax of 45% remains payable on taxable income above £150,000.
The Chancellor announced that the personal allowance will be increased to £11,500 and the basic rate limit increased to £33,500 for 2017/18. The higher rate threshold will therefore rise to £45,000 for those entitled to the full personal allowance.
Currently, when a dividend is paid to an individual, it is subject to different tax rates compared to other income due to a 10% notional tax credit being added to the dividend. So for an individual who has dividend income which falls into the basic rate band the effective tax rate is nil as the 10% tax credit covers the 10% tax liability. For higher rate and additional rate taxpayers, the effective tax rates on a dividend receipt are 25% and 30.6% respectively.
From 6 April 2016:
- the 10% dividend tax credit is abolished with the result that the cash dividend received will be the gross amount potentially subject to tax
- a new Dividend Tax Allowance charges the first £5,000 of dividends received in a tax year at 0%
- for dividends above £5,000, new rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
Many individuals do not have £5,000 of dividend income so are potential winners in the new regime. The removal of any tax on dividends up to £5,000 increases the attractiveness of holding some investments which provide dividend returns rather than interest receipts. Use can then also be made of the CGT annual exemption by selective selling of investments.
Basic rate taxpayers in particular need to appreciate that all dividends received still form part of the total income of an individual. If dividends above £5,000 are received, the first £5,000 will use up some or all of any basic rate band available. The element of dividends above £5,000 which are taxable may well therefore be taxed at the higher rate of 32.5%.
Tax on savings income
In 2015/16 some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However, the rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.
The starting rate limit remains at £5,000 for 2016/17.
In addition, from 2016/17 the Savings Allowance (SA) will apply to savings income. Income within the SA will be taxed at a new 0% rate (the ‘savings nil rate’). However, the available SA in a tax year will depend on the individual’s marginal rate of income tax. Individuals taxed at up to the basic rate of tax will have an SA of £1,000.
For higher rate taxpayers, the SA will be £500 whilst no SA is due to additional rate (45%) taxpayers.
Alongside the introduction of the SA, banks and building societies will cease to deduct tax from account interest they pay to customers.
The new SA will exempt interest from tax for many taxpayers, with the government anticipating that around 95% of taxpayers will not have any tax to pay on their savings income. However, the allowance works in a complex way. For example, a taxpayer whose total non-savings income is near to £43,000 in 2016/17 (the point from which higher rate taxes are payable) needs to be aware that savings income is still added to other income to determine whether the SA is £1,000 or £500.
Individual Savings Accounts (ISAs)
The overall ISA savings limit is £15,240 for 2015/16 and will remain at this figure for 2016/17.
Two changes are proposed with effect from 6 April 2016. The following changes will be made to the existing ISA Regulations:
- Savers will be allowed to replace cash they have withdrawn from their account earlier in a tax year, without this replacement counting towards the annual ISA limit for that year. This flexibility will be available in relation to both current year and earlier years’ ISA savings where provided for in the terms and conditions of a ‘flexible ISA’.
- A third ISA, the Innovative Finance ISA, is being introduced for loans arranged via a peer to peer (P2P) platform.
The total an individual can save each year into all ISAs will be increased from £15,240 to £20,000 from April 2017.
A new Lifetime ISA will be available from April 2017 for adults under the age of 40. Individuals will be able to contribute up to £4,000 per year and receive a 25% bonus from the government. Funds, including the government bonus, can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 completely tax-free.
Further details of the new account, which will be available from 2017, are as follows:
- Any savings an individual puts into the account before their 50th birthday will receive an added 25% bonus from the government.
- There is no maximum monthly contribution and up to £4,000 a year can be saved into a Lifetime ISA.
- The savings and bonus can be used towards a deposit on a first home worth up to £450,000 across the country.
- Accounts are limited to one per person rather than one per home, so two first time buyers can both receive a bonus when buying together.
- Where an individual already has a Help to Buy ISA they will be able to transfer those savings into the Lifetime ISA in 2017, or continue saving into both. However only the bonus from one account can be used to buy a house.
- Where the funds are withdrawn at any time before the account holder is aged 60 they will lose the government bonus (and any interest or growth on this) and will also have to pay a 5% charge.
- After the account holder’s 60th birthday they will be able to take all the savings tax-free.
The new Lifetime ISA is designed to allow flexible saving for first time buyers and those wishing to save for their retirement. The Chancellor said in his speech:
‘My pension reforms have always been about giving people more freedom and more choice.
So faced with the truth that young people aren’t saving enough, I am today providing a different answer to the same problem.’
Help to Save
The government has also announced the introduction of a new type of savings account aimed at low income working households.
Individuals in low income working households will be able to save up to £50 a month into a Help to Save account and receive a 50% government bonus after two years. Account holders can then choose to continue saving under the scheme for a further two years. The scheme will be open to all adults in receipt of Universal Credit with minimum weekly household earnings equivalent to 16 hours at the National Living Wage or those in receipt of Working Tax Credits.
Accounts will be available no later than April 2018.
Pensions consultation and reform
The government consultation ‘Strengthening the incentive to save’ looked at the way pensions are taxed. The consultation found that while the current system gives everyone an incentive to save into a pension, and people like the 25% tax free lump sum, it is also inflexible and poorly understood. Young people in particular are not saving enough, often because they feel they have to choose between saving for their first home and saving for retirement.
The Chancellor said in his speech:‘Over the past year we’ve consulted widely on whether we should make compulsory changes to the pension tax system. But it was clear there is no consensus.’
The Chancellor is introducing the Lifetime ISA as a vehicle for younger people to save.
The Financial Advice Market Review (FAMR) aims to support the provision of affordable and accessible advice. FAMR was a joint review between the Financial Conduct Authority and Her Majesty’s Treasury, and its recommendations were published on 14 March 2016.
The government commits to implement all of the recommendations for which it is responsible, and will:
- Consult on introducing a single clear definition of financial advice to remove regulatory uncertainty and ensure that firms can offer consumers the help they need.
- Increase the existing £150 Income Tax and National Insurance relief for employer arranged pension advice to £500. The new exemption will ensure that the first £500 of any advice received is eligible for the relief. It will be available from April 2017.
- Consult on introducing a Pensions Advice Allowance. This will allow people before the age of 55 to withdraw up to £500 tax free from their defined contribution pension to redeem against the cost of financial advice. The exact age at which people can do this will be determined through consultation. This means that a basic rate taxpayer could save £100 on the cost of financial advice.
The government will also restructure the delivery of public financial guidance to make it more effective.
Phased rollout of Tax-Free Childcare
The government has announced it will introduce Tax-Free Childcare in early 2017. Tax-Free Childcare will be gradually rolled out to children under 12 with the parents of the youngest children being able to enter the scheme first. The scheme will be open to all eligible parents by the end of 2017.
The existing scheme, Employer-Supported Childcare, will remain open to new entrants until April 2018 to support the transition between the schemes.
Property and trading income allowances
The government will introduce a new £1,000 allowance for property income and a new £1,000 allowance for trading income from April 2017. Individuals with less than £1,000 of either source of income will no longer need to declare or pay tax on that income.
Those with income above £1,000 will be able to deduct their expenses in the usual manner or simply deduct the £1,000 allowance.
Finance costs restriction for landlords
Legislation will be introduced relating to finance costs on residential properties incurred on or after 6 April 2017 in order to ensure that:
• individual beneficiaries of deceased persons’ estates are entitled to the basic rate tax reduction
• the total income restriction to the tax reduction applies where the relevant finance costs or property profits are higher than the total income
• the total income is a measure of the net taxable income after other reliefs
• any carried forward tax reduction is given in any subsequent year in which property income is received, even if there is no restriction on the deduction of finance costs in that year, as the loan may have been repaid.
Reform of the wear and tear allowance
As announced at Summer Budget 2015, the wear and tear allowance is being abolished from April 2016. Landlords will be able to deduct the actual costs of replacing furnishings.
Bad debt relief for peer-to-peer lending
Tax relief will be allowable on bad debts incurred on peer-to-peer loans against other peer-to-peer income.
From April 2017 non-UK domiciled individuals will be deemed UK domiciled if they have been resident in the UK for 15 of the past 20 tax years. This was announced in Summer Budget 2015.
In addition individuals who were born in the UK and who have a UK domicile of origin will revert to their UK domiciled status whilst they are resident in the UK.
The government will also legislate to charge inheritance tax (IHT) on all UK residential property indirectly held through an offshore structure from 6 April 2017.
Benefits in kind
The law regarding the taxation of benefits in kind is being clarified with effect from 6 April 2016.
The concept of ‘fair bargain’ only applies to general taxable benefits where the taxable amount is based on the cost to the employer of providing the benefit.
If an employee receives goods or services from their employer at the same cost as a member of the public there is no benefit in kind.
The concept of ‘fair bargain’ does not apply to the taxation of certain benefits in kind which have specific charging rules, such as beneficial loans, accommodation and company cars.