Important Tax Changes - April 2016
Although pension freedoms grabbed the headlines in 2015, the Chancellor also made significant changes to the taxation of savings and investments. These changes will affect both existing and new investors and will need to be carefully considered.
Two new allowances will be introduced from 6th April 2016, as follows;
Savings Tax Allowance
For basic rate taxpayers, the first £1,000 of interest will be paid tax free, whilst higher rate tax payers will receive the first £500 of interest tax free. Additional rate taxpayers will not receive the allowance.
Dividend Income Tax Allowance
Currently, dividends from shares and collective investments such as Unit Trusts are distributed with a 10% tax credit. Basic rate taxpayers have no further liability, whilst higher rate taxpayers pay the difference via self assessment.
From the 6th April, tax credits will be abolished. The first £5,000 of dividend income will be tax free, however, the income above £5,000 will become taxable as follows;
Basic Rate taxpayer – 7.5%
Higher rate taxpayer – 32.5%
Additional rate tax payer – 38.1%
Clients receiving dividend income above £5,000 will be responsible for remitting the tax liability via self assessment. Based on current average yields, anyone with an equity income portfolio worth more than £140,000 will incur a tax charge.
The changes will create both winners and losers and it is important to ensure that existing arrangements are reviewed and new recommendations maximise reliefs and allowances. Clients should also be made aware of any potential tax liabilities before they spend all the income!