Now the Self Assessment season has passed, it seems a good time for a quick update on the changes coming up in April 2016.
None of this is new, but it comes from various Budgets and Autumn Statements (the Government like to keep us on our toes by announcing lots of changes at the same time that come into force at various points in the future!).
Along the way you will hopefully see a few areas where you can take action to reduce your tax bill, if you act quickly!
First up…. personal tax!
The Personal Allowance is going up to £11,000 on 6 April 2016 (i.e. for the 2016/17 tax year). This means the first £11,000 of income is tax free, no matter what that income is made up of. There remains, however, a claw-back of personal allowance for those with adjusted net income of over £100,000, with the personal allowance forfeit in full at income of over £122,000. Broadly, “adjusted net income” is total income less gross personal pension and/or gift aid contributions.
The basic rate limit will be increasing from £31,785 to £32,000 from 6 April 2016, meaning that the higher rate threshold will be £43,000 for those entitled to the full personal allowance.
Tax planning tip: If your income is expected to be over £100,000, you can save a huge amount of tax (up to 60% depending on your income type) by making personal pension contributions or gift aid donations. This applies in the current tax year too, so if you make your contributions by 5 April 2016 and your income is over £100,000 in the 2015/16 tax year, you will see the benefit a year sooner. Always consult a financial advisor before making pension contributions, as there are further considerations to be made, including your annual allowance.
The current Pensions Annual Allowance, as alluded to above, is £40,000. However from 6 April 2016 there will be a tapering of this Annual Allowance for those with income of over £150,000, down to a minimum of £10,000. This applies to total pension contributions, both individual and employer.
Tax planning tip: consider making a pension contribution before 6 April 2016 to utilise a higher annual allowance than you may get in future – discuss this with your pension advisor.
The big change for small companies is the new Dividend Tax regime. The Chancellor has done away with the status quo and introduced radical changes from 6 April 2016. Historically, as long as income was kept below the higher rate threshold, there has been no tax to pay on dividends, and dividends over this up to £150k had an effective 25% tax rate (over £150k, the rate was 30.56%). There used to be a strange “grossing up” and a “notional tax credit”, courtesy of Gordon Brown, both of which will disappear. From 6 April 2016 there will be a £5,000 Dividend Tax Allowance – effectively this is a 0% tax rate band, so there is no tax to pay on the first £5,000 of dividend income. After this, the rates are 7.5% in the basic rate band, 32.5% in the higher rate band, and 38.1% for additional rate taxpayers. For individuals with small shareholdings that receive dividends of less than £5,000 there will be either no change or a tax saving (depending on their level of income) but for those with over £5,000 of dividends, it will cost more in tax.
Tax planning tip: It may be tax efficient for you, depending on your income level, to take additional dividends before 6 April 2016 rather than after this date. While this will advance the date that the tax on the dividend will need to be paid, it may save tax overall. If you think this affects you, please get in touch.
Did you know that when your bank pays you (that tiny amount of) bank interest, they are obliged by default to deduct 20% tax? From 6 April 2016, this will cease to happen, due to the new Personal Savings Allowance (PSA), whereby certain interest received will be TAX FREE (we like tax free!). The PSA will apply for up to £1,000 of a basic rate taxpayer’s savings income, and up to £500 of a higher rate taxpayer’s savings income – there is no allowance for additional rate taxpayers. This represents a tax saving of up to £200 and will mean that most people will pay no tax at all on their interest income. However those with interest received over the thresholds will have a tax bill, due in January 2018 via Self Assessment. This doesn’t affect ISAs, where interest will remain tax free. If you wish to discuss any of this further please contact us.
Coming soon…. Employment tax
Katie Kettle, Technical Manager