This article provides a reminder of the significant number of changes that have already been announced which are due to come into effect from 6 April 2016.
The UK Government has focused its attention on pension reform over the last couple of years and there was some suggestion there might be more to come this time around, which didn’t transpire. However, not all of the changes previously announced were centred around pensions. Other significant changes are due to come into effect from 6 April 2016 and this article provides a reminder of those changes.
The personal allowance will increase from £10,600 to £11,000.
This is a valuable increase of £400 (or £800 for married/civil partnered couples). Individuals and married/civil partnered couples who are not currently maximising their income to utilise their personal allowance are possibly paying more tax than necessary.
It is possible to maximise the use of the personal allowance by generating income which falls within the personal allowance. Married couples could also benefit from transferring assets* between the couple so that the income is generated by the lower income spouse/civil partner.
*Transferring assets between spouse/civil partners is generally tax-neutral and won’t be assessable to income tax, capital gains tax or inheritance tax.
Personal Savings Allowance
A Personal Savings Allowance (PSA) is being introduced which allows an individual to receive a certain level of savings income without incurring a liability to income tax.
Savings income includes, but is not limited to, interest from savings accounts held with banks, building societies, NS&I and credit unions; as well as interest distributions from authorised unit trusts and open-ended investment companies (OEICs), purchased life annuity payments and gains from certain contracts for life insurance such as offshore life assurance bonds.
The PSA is £1,000 for basic rate taxpayers and £500 for higher rate tax payers who benefit from a maximum tax saving of £200 (tax year 2016/2017). Additional rate taxpayers are not entitled to the allowance.
Consider a Basic Rate taxpayer with earned income of £30,000 and savings income of £5,000: The first £1,000 of savings income is within the personal savings allowance and the £4,000 excess is subject to basic rate tax at 20%. A tax saving of £200.
For a Higher Rate taxpayer with earned income of £50,000 and savings income of £5,000: The first £500 of savings income within the personal savings allowance and the £4,500 excess is subject to higher rate tax at 40%. A tax saving of £200.
Whilst savings income received within the allowance is not liable to tax, it does count towards an individual’s “adjusted net income” and this can therefore affect the amount of allowance an individual is entitled to receive. If savings income, when added to other income, tips the taxpayer into the next tax bracket this will impact the personal savings allowance and the amount of tax payable.
For a basic rate taxpayer earning £42,000 with savings income of £1,000: The PSA of £1,000 is available in full because the adjusted net income is within the basic rate threshold; therefore there is no tax to pay on savings income. If the individual had earned income of £42,010 and savings income is £1,000, the outcome is slightly different.
Adjusted net income is £43,010 which is within the higher rate tax band. This means the personal savings allowance is reduced to £500; therefore a tax liability arises on £500 of the savings income. £490 @ 20% and £10 @40% = £102 total.
- Make maximum use of the personal savings allowance – if it’s not used it’s wasted
- Consider restructuring assets that generate savings income so that a lower rate taxpayer (husband or wife) can utilise the savings allowance too.
New dividend tax rules come into effect. From 6 April 2016 a tax-free dividend tax allowance of £5,000 will apply to all tax payers – this replaces the 10% dividend tax credit and the rates of dividend tax will change. The rates of tax are as follows:
|Basic Rate taxpayer
|Higher Rate taxpayer
|Additional Rate taxpayer
This means that investors who receive dividend income within the tax-free dividend tax credit will receive this free of income tax.
Let us consider and compare the current regime against the new regime, assuming £10,000 dividend income is received.
||2015/16 tax year
||2016/17 tax year
|Net dividend (including 10% tax credit)
||Additional tax to pay
||Actual dividend income after tax
(no tax credit)
|Tax to pay
||Actual dividend income after tax
When considering how best to structure your clients’ investments consider:
- maximising the use of the dividend tax allowance – married/civil partnered couples can receive up to £10,000 dividend income without any liability to tax
- whether there are more suitable tax-efficient investments which generated dividend income but wouldn’t use the dividend tax band (ISAs)
- dividend yields and where they are generated from.
Do not forget the impact of these changes where a trust is concerned – dividends within a bare trust are assessable against the beneficiary and will use the dividend tax allowance for that individual.
For more information on the new rules please read our articles Dividend Taxation – it’s all about to change! and Changes to Dividend Taxation.
Stamp Duty Land Tax and second properties
From 1 April 2016 purchases of second properties which complete after this time will be subject to higher rates of stamp duty. This will apply to purchases of additional residential properties such as buy-to-lets and second homes. Not all properties are caught by the new rules, those that are worth less than £40,000 are excluded from the higher rates.
There is a two tier test to determine if the new rules will apply to purchasers:
- Will two or more properties be owned after the new property has been purchased? If the answer is yes then the second Tier is tested. If the answer is no, the new rules do not apply.
- Does the property being purchased replace the main residence which is being sold?
If it does not then the transaction will be subject to the higher rates of SDLT.
If it does then the transaction is not subject to the higher rates of SDLT. However, where the previous main residence has not been sold before the purchase of the new property, the transaction will be subject to the higher rates of SDLT and a refund can be reclaimed if the previous main residence is sold within 18 months.
When advising clients you need to consider the following:
- Married couples/civil partners are one unit for the purpose of the Tier test. If a home is jointly owned they are both deemed to own one residence.
- All property, regardless of where it is situated in the world, is deemed additional property.
- The rules apply to residential properties only, not commercial/non-residential properties.
- Properties which form part of a trust and whether or not the interest of the beneficiary is absolute, because this will impact the applicability of the rules.
For more information please read Let to Buys more costly.