New Tax Year – New Rules
New tax allowances and rate.
You’ll probably know that new rules and tax rates will apply from 2016/17 to dividends and certain other types of investment income, principally deposit account interest and government stocks and bonds. There will be a dividend nil rate band (DNRB) and the personal savings allowance (PSA).
Since the rules were snuck in during the post-election budget (there were essentially 3 budgets in 2015!!), there has been confusion and misunderstanding surrounding how the new rules will affect the tax position across a broad spectrum of taxpayers.
Savings: The PSA is a maximum of £1,000 for basic rate taxpayers and £500 for those who pay at the higher rate. It’s zero for additional rate taxpayers.
Dividends: The DNRB is £5,000 for all taxpayers. These two new allowances don’t interact, i.e. each can only be used against the type of income to which it relates and neither affects the amount of the other you’re entitled to. However, where you use any of either allowance it also uses part of your basic rate tax band, so potentially, this could be pushing taxpayers into the next tax banding.
Tax planning. The introduction of the PSA raises a question over whether you should rethink your ISA investments. After all, if you can receive up to £1,000 bank or building society interest tax free why bother with an ISA (which have recently been offering paltry interest rates)?
- ISAs still make good sense because you can build up significant savings on which all the interest is tax free. However, because interest rates on ISAs are usually low compared with, say, a high interest term account, it also makes sense to open one of these to take advantage of your PSA, especially if you’re a basic rate taxpayer.
- Depending on your circumstances, there may be other relatively simple tax planning means by which you can generate interest income.
- As regards Dividends, if, as a higher / additional rate taxpayer, you’ve been avoiding taking dividends as income now may be the time to look at restructuring your investments or your remuneration strategy to take full advantage of the new £5,000 DNRB.
All Round Accounting Limited
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