Changes to Taxation 2016/17

Published byKaren Currie

16th February 2016

From 6th April 2016 three key changes to taxation which could affect your tax liability will come into force.

The changes will be in effect for the year beginning 6th April 2016. These changes will affect dividend income, gift aid and bank interest.

Changes to Tax on Dividends:

As of April 2016, the 10% tax credit on dividends is to be abolished and replaced with an annual dividend allowance of £5,000. The annual allowance means that the first £5,000 of dividend income received in the tax year will be tax-free for everyone, regardless of their level of income.

Any dividend income that exceeds the annual dividend allowance will now be taxable at the following rates:

                                     Income                                    New Rate

Non Tax-payers          £0 - £11,000                            0%

Basic Rate                  £11,000 - £32,000                   7.5%

Higher Rate                 £32,000 - £150,000                 32.5%

Additional Rate            Over £150,000                        38.1%

How will these changes affect you? If you are a basic rate tax-payer and your dividend income does not exceed the allowance then you will not be affected by the changes. However, if your dividend income exceeds £5,000, then you will be adversely affected as you will be liable to pay tax at 7.5% on the excess whereas under the current rules you had no liability on dividends. Basic rate tax-payers who receive more than £5,000 of dividend income will also need to complete a self-assessment tax return from 6th April 2016.

If you are a higher rate or additional rate tax-payer, the changes could be beneficial – you could be £1,250 to £1,350 better off each year. However, there is a point where the tax saved by the new allowance is outweighed by the new higher rates of tax.

Higher rate tax-payers who have dividend income less than £21,660 and additional rate tax-payers with dividend income less than £25,400 will benefit from the changes. Those whose dividend income exceeds these thresholds will find that they have more tax to pay on their dividend income under the new rules than in previous years.

The new changes will not affect dividends received by pensions or ISAs regardless of your income tax band.

Gift Aid Payments:

With the abolition of the dividend tax credit, individuals will no longer be able to use the tax credit attached to their dividend income to satisfy the gift aid withholding tax on charitable donations.

Primarily this will affect two groups of people: an individual whose income is less than the personal allowance (£11,000) and receives less than £5,000 of dividend income; and wealthy benefactors who receive large sums of dividend income and give away a high percentage of their income.

In both of these cases, individuals may find that they become liable for additional tax on any donations made through gift aid if the donations exceed 4 times the tax paid by them for that year.

Changes to Tax on Bank Interest:

The government has also introduced a new personal savings allowance for basic rate and higher rate tax-payers. As of 6th April 2016, basic rate tax-payers will be entitled to receive £1,000 of savings income tax-free while higher rate tax-payers will have an allowance of £500. Additional rate tax-payers will not receive an allowance and will therefore be unaffected by this change.

Savings income is interest from banks, building societies and National Savings. It also includes interest from authorised unit trusts and income from government stocks.

As a result of the new allowance, the way banks and building societies pay interest will also change. Currently the majority of interest is paid net unless an individual has specified otherwise. As of 6th April 2016, all bank and building society interest will be paid gross and any interest exceeding the allowances will be taxed via the individual’s PAYE code (resulting in a deduction in their personal allowance) or collected through self-assessment.

Interest earned on savings held in an ISA will not be affected by the changes and remain exempt from income tax.