The 2016 Spring Budget announced a number of changes affecting investors. A summary of the key changes from the latest budget, and changes which are due to come into force in the new tax year are listed below:
The Personal Allowance
Last year’s Budget revealed that that the 2016/17 personal allowance would be £10,800, but the Summer Budget added a further £200 bringing the figure to £11,000. Similarly, the 2017/18 allowance has been revised to £11,500 in the latest budget.
The Personal Savings Allowance
The personal savings allowance (PSA) was revealed in last year’s Spring Budget, but only begins in 2016/17. Broadly speaking, if you are a:
- Basic rate taxpayer, the first £1,000 of savings income you earn will be untaxed;
- Higher rate taxpayer, the first £500 of savings income you earn will be untaxed;
- Additional rate taxpayer, you will not receive any personal savings allowance.
‘Savings income’ in this instance is primarily interest, but also includes gains made on offshore investment bonds. Although called an allowance, the PSA is actually a nil rate tax band, so it is not quite as generous as it seems. The PSA’s arrival will mean that from 6 April 2016 banks and building societies will no longer deduct tax from interest and neither will National Savings & Investments from those products it currently pays net interest on (such as 65+ bonds).
The Budget announced that from 2017/18 the removal of the requirement to deduct tax on interest payments would be extended to open-ended investment companies, authorised unit trusts, investment trust companies and peer-to-peer loans arrangements.
If you and your spouse/civil partner receive substantial interest income, it is worth checking that you both maximise the benefit of the PSA. However, at current low interest rates, you might also want to consider whether you could earn a higher income from your investments.
The Dividend Allowance
The dividend allowance was a surprise announcement in last year’s Summer Budget and also begins in 2016/17. The main target was private company shareholders who use dividends rather than salary to extract profits.
The allowance will mean that the first £5,000 of dividends you receive in a tax year will not be subject to any further tax, regardless of your marginal tax rate. Once the £5,000 allowance is exceeded, there is a higher tax charge than at present, as the table below shows, so you could ultimately pay more tax on dividend income, in spite of the new allowance. The existing 10% dividend tax credit will disappear from 6 April 2016, so those rates in the table for 2016/17 are the rates you will pay.