From 6 April 2016, there have been a number of changes in the way that savings income, including interest and dividends, is taxed. As with all tax changes, there will be new opportunities for taxpayers to reduce their tax burden by ensuring that their affairs are structured efficiently. The changes have been billed as a simplification which would lift many taxpayers out of self-assessment. However, whilst the changes will bring simplification for some, they will also mean that others need to complete a tax return, where they did not before. Whether you benefit from these new changes or are penalised by them will depend on your individual circumstances. For example, if a basic rate tax payer receives dividends of more than £5,000 per annum, they will have a tax liability on these dividends for the first time under the new rules and will need to complete a tax return.

So, what’s changed in the taxation of interest?

Since 6 April 2016, every taxpayer has a new ‘personal savings allowance’ (PSA). For a basic rate taxpayer, the first £1,000 of savings income will be taxed at 0% and for a higher rate taxpayer, the first £500 of savings income will be taxed at 0%. No PSA is available for an additional rate taxpayer. The PSA is actually a nil rate of tax rather than an ‘allowance’ in the truest sense. This means that it does not reduce net income for the purpose of determining whether a personal allowance is available or whether the high income child benefit charge applies; it is therefore not quite as generous as it seems. As a result of this, from 6 April 2016, banks and building societies no longer deduct tax from interest, this is now paid gross.

What about dividends?

From 6 April 2016, there were also major changes to the rules on dividend taxation. There were three main changes:

Firstly, the 10% notional tax credit was removed. Secondly, the tax rates on dividends have substantially increased at all levels; to 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. The new rates with their comparatives are shown below.

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The third change mirrors the PSA above. Each taxpayer will receive a £5,000 Dividend Allowance (DA). Like the PSA mentioned above, this is also a nil rate of tax rather than a true allowance.

Making the most of these changes

In light of these changes, some of the areas that taxpayers should be considering are:
• Spouses/civil partners should ensure that one party is not wasting their PSA or DA. Assets can be transferred between them to maximise their tax free allowances.
• It may not be essential to invest in cash ISAs or stocks and shares ISAs in light of the new allowances, as the first slice of savings or dividends will be tax free.
• For the business owner, it may be worth considering whether it would be more tax efficient to incorporate the business. (This will depend on individual circumstances).
• Shareholders/directors of owner managed companies need to consider the most efficient tax structure for their rewards. For example, ensuring they make use of their DA by taking dividends of at least £5,000 per annum and by charging interest on loans they make to their companies to make use of their PSA.

For a more detailed discussion of how the new rules can affect you and what you might be able to do to improve your tax position, please contact Mel Hackney or Steve Wiltshire on 0117 304 8455.