Changes To Dividend and Savings Income

The changes to dividends and savings income from 6 April 2016 hit the BBC headlines as ‘New Savings Allowance to boost income for millions from April’ but there are some winners and some losers. The changes could have a significant impact for a number of taxpayers and depending on individual circumstances, some taxpayers may find that they need to prepare a Tax Return for the first time, others may notice an increase in their tax bill as a result, whilst some will see theirs fall.

SAVINGS INCOME

Banks, Building Societies and National Savings are no longer required to deduct basic rate income tax at source from interest paid to savers. Therefore, interest received since 6 April 2016 will be paid gross.

In addition to this, a new Personal Savings Allowance (PSA)

has been introduced for the 2016/17 tax year onwards. For basic rate taxpayers this is £1,000, and for higher rate taxpayers, £500. Additional rate taxpayers will not be entitled to a PSA.

To illustrate the potential implications of these changes, let’s consider a couple of examples.

Chris is a basic rate taxpayer with pension and interest income. He usually receives around £1,600 in interest into his bank account (net) each year. Prior to 2016/17, this interest will have already had £400 of basic rate income tax deducted at source by the bank. In 2016/17 Chris will notice that the interest he receives during the course of the tax year will be more since the bank will not deduct any income tax from the interest so he will receive £2,000. Of this, £1,000 will be covered by the PSA and £200 income tax will be payable on the remainder. HMRC will most likely try to collect this tax via Chris’s tax code for 2016/17.

Taxpayers in this position should check their 2016/17 tax codes very carefully. HMRC have said they will base the adjustments to an individual’s tax code on information received from banks and building societies etc. In the above example, Chris will probably find that the tax he pays through PAYE on his pension income will increase to collect the tax due on his interest income.

Looking at another example, Adele completes a Tax Return each year and is an additional rate tax payer with her two sources of income being self-employment income and interest on her savings of typically £10,000 gross per annum. Prior to 2016/17, Adele paid an additional £2,500 of tax on her interest income (20% was deducted at source and the highest rate of tax payable on interest income is 45%). From 2016/17 onwards, no tax will be deducted at source and Adele will notice an increase of £2,000 in her tax payable after the end of the year.

DIVIDEND INCOME

A new dividend allowance has also been introduced from 6 April 2016 for UK resident individuals. It is not available to trustees or personal representatives. Dividend tax credits have disappeared and instead there is an annual dividend allowance of £5,000. Dividends received above this level will be treated as the highest band of income and taxed at the following rates:

  • 7.5% for basic rate taxpayers
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers

For example, let’s assume Matt is a basic rate taxpayer with employment income of £30,000 and also receives dividend income of around £10,000 per annum. Matt will not have had a tax liability on his dividend income in 2015/16 as it was within his basic rate tax band (so covered by the notional 10% tax credit on dividends). In 2016/17, Matt will have a tax liability of £375 on his dividend income.

Individuals in this circumstance may need to complete a Tax Return for the first time in 2016/17. HMRC have indicated that they may issue a ‘Simple Assessment’ to taxpayers in this position (rather than asking them to complete a Tax Return) but the detail on this has yet to be confirmed.

Now let’s consider the example of Ellie who is a higher rate taxpayer with significant pension income and dividend income each year of £5,000. Prior to 2016/17, Ellie will have had a tax liability of £1,250 on her dividend income but for 2016/17, the £5,000 dividend income is covered by the dividend allowance and she will not have a tax liability on the dividends at all.

As you will appreciate, the changes to savings and dividend income from 6 April 2016 will affect certain taxpayers in a number of different ways. Those affected will need to consider their individual circumstances and we would be happy to provide assistance on how their tax liability for 2016/17 may be affected and what action they may need to take as a result.

The above is for general guidance only and no action should be taken without obtaining specific advice.