The start of the new tax year brought with it some new allowances that may affect you, meaning you could pay less tax (or more!) depending on how your income is made up. The changes will also probably lead to a more complex tax calculation, which seems par for the course these days…..
To start with though, the standard income tax bands haven’t really seen much of a change, just a minimal increase in the basic rate band:
| Tax Bands | 2016/17 | 2015/16 |
|---|---|---|
| Starting Rate (Savings Income) | £5,000 | £5,000 |
| Basic Rate Band | £0 - £32,000 | £0 – £31,875 |
| Higher Rate Band | £32,001 - £150,000 | £31,876 - £150,000 |
| Additional Rate Band | £150,000 + | £150,000 + |
The personal allowance has also increased from £10,600 to £11,000, and you will still start to lose it as soon as your income creeps over the £100,000 mark.
Savings
From 6th April 2016 personal bank interest will be paid gross, and form R85 will be discontinued (there being no need for it anymore).
The £5,000 starting rate for savings is 0%, which means that you can earn interest of £5,000 and not pay any tax on it. However, if you have other income then this tax band will be restricted by that amount until it is totally gone. Effectively this means that unless your income is only from savings or you have very minimal other income, this £5,000 0% band will not apply to you.
In addition to the savings rate band, there is a new allowance that will apply to everyone regardless of other income, called the Personal Savings Allowance. This allowance is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, and exempts that amount of savings income from tax. Add this to the fact that ISA interest does not touch a tax computation, and it could mean all of your savings interest is tax free!
Dividends
The changes to dividend tax should make understanding and planning around it easier, although for most people who run their own business it will mean an increase in the tax they pay.
Dividends used to be grossed up by their notional tax credit of 10%, so £9,000 became £10,000 with a credit of £1,000. The basic, higher or additional tax was then calculated, the credit deducted, and your liability was left. This was a complex system, and one that many non-accountants struggled to understand the logic of.
The new system works thus:
| Tax Bands | Percentage |
|---|---|
| First £5,000 | 0% |
| Basic Rate Band | 7.5% |
| Higher Rate Band | 32.5% |
| Additional Rate Band | 38.1% |
You can also use your personal allowance against dividends, so the first £16,000 could be tax free, if you have no salary. Add to this £1,000 in interest and you could have £17,000 income tax free.
To put the dividend changes into perspective, if your sole income in the last tax year was a salary of your personal allowance plus dividends up to the higher rate band, and you intend doing the same this year, then these changes will mean additional tax for you of around £2,000. That’s still a tax rate of under 5% of gross income, so remains a better option than salary by far.
Gift Aid and Pensions
There are no other major changes, but it’s worth highlighting a planning opportunity whilst we’re here talking tax bands. In order to mitigate your tax liability you should ensure that you’re including any personal pension contributions and charity donations on your tax return. These will increase the bands above by 8/10 – so donate £100 to charity and your Basic Rate Band upper limit changes from £32,000 to £32,125, meaning you save tax on that income as it will be taxed at 20% rather than 40% (assuming it’s salary). This has a knock on effect on the Higher & Additional rate bands too, so your Higher Rate Band upper limit becomes £150,125.
If you are planning a large pension contribution or charity donation, check the level of your income to ensure the tax year it’s made in will give you the best overall tax result given the effects explained above – if you have only basic rate income in one year and higher rate income in the next, it may be worth delaying (check with your IFA in regard to pensions as there are other considerations).
Charity donations made after the end of the tax year can also be included if the return has not yet been filed, so make sure you’re looking at your whole position before you file your return.
This is also useful if you are in danger of losing your personal allowance, as the £100,000 limit is based on net relevant income – that’s income after adjusting for pension contributions and charity donations.
Dividends and Gift Aid – a word of caution
In order to allow a charity to claim Gift Aid the donor must certify that they are a UK taxpayer. In prior years it would be perfectly possible to pay no tax at all yet still satisfy that criteria, as the dividend tax credit acted as “notional tax paid”. The changes in this year mean that is no longer the case, so if you pay no tax but still give to charity under Gift Aid you will bear the liability for that Gift Aid on your tax return. The charity will reclaim 20% from HMRC under the scheme, and HMRC will reclaim it from you!
Gift Aid declarations stay in place until revoked, so if you will not be paying tax in 2016/17 but donate under a DD to charity, it’s worth checking and possibly changing the status. If you own your own company you could consider a company contribution instead, which may instead qualify for CT relief.
Marriage Allowance Transfer
If you’re married and your spouse doesn’t receive enough income to use up their personal allowance, don’t forget the Marriage Allowance. This will enable £1,100 of their allowance to be transferred to you, potentially lowering your tax bill by £220. The huge downside to this allowance, which probably explains why it hasn’t seen a big take-up, is that both the donor and recipient spouse must be non taxpayers or basic rate taxpayers. If the recipient spouse is a higher or additional rate taxpayer then they are not eligible.
If you want to apply, you can do so online here: https://www.gov.uk/marriage-allowance
What should you do?
Plan! If you run your own business then you likely have influence over how you’re paid, so you have the opportunity to plan your income in order to get the best result from a tax point of view. Talk to your accountant or tax adviser about what you can do now to ensure 2016/17 is as tax free as possible!
Please note that this blog is intended as an overall introduction to the subject matter, and should not be taken to be exhaustive or specific advice. You should discuss your individual personal circumstances with your own professional adviser before taking any action.