How will the new personal savings allowance and dividend allowance will affect savers?
The Personal Savings Allowance will be introduced from April 2016, which will effectively abolish tax on savings for an estimated 95 per cent of savers. For a basic rate taxpayer, this will be £1,000 of allowance to set against savings income. For a higher rate taxpayer this will be £500. There is no new personal savings allowance for additional-rate tax payers who will not benefit from this allowance.
It is important to note that the allowance does not just apply to interest received from banks and building societies. Interest paid from other providers such as credit unions and certain national savings products will all qualify for the new personal savings allowance, as will interest distributions from those holding authorised unit trusts, OEICS, Investment Trusts, corporate bonds and gilts.
Whilst this new personal allowance will benefit the majority of savers, it may have unintended consequences for those whose earned income plus savings income push them into a higher tax bracket, where the full effect of the allowance could be lost.
For example, if an individual basic rate tax payer has a combination of income and savings interest which tips their total income into the higher tax bracket by just £1, they will lose the full £1,000 allowance and only be entitled to the lower £500 allowance on their savings, as they are now a higher rate tax payer. HMRC have confirmed the amount of personal savings allowance available will be based on adjusted net income, meaning that pension contributions and Gift Aid donations made by the individual can be taken into account.
So with some careful planning, those nearing the higher rate tax bracket may be able to retain the full personal savings allowance through a combination of making pension contributions and monitoring interest withdrawals from their savings. Of course, with changes to pensions tax relief expected to be implemented at the forthcoming budget on 16 March 2016, savers will have to be alive to the possibility of moving goalposts in this area too.
Also from April 2016, the Dividend Tax Credit will be abolished, to be replaced with a new tax-free Dividend Allowance. This is intended to be a simpler system, which will really only affect those who have significant dividend income.
Tax will be payable on dividends over the £5,000 allowance and will be set according to whether you are a basic, higher or additional rate tax payer.
The changes will really hit those who have personal or family companies where the lion’s share of income is taken as dividends rather than salary. Indeed, this move is intended to discourage tax motivated incorporation of sole and smaller traders.
In summary, April 2016 will herald a significant amount of change for savers with the introduction of the personal savings allowance, the new dividend allowance, and potentially significant changes to tax relief on pensions. Those taking savings income will see payments made gross and will be accountable for any further tax due to HMRC and must tread carefully to ensure they appreciate the interaction of these new allowances with their overall income from all sources.
Richard Libberton is a private wealth manager at Anderson Strathern Asset Management.
A version of this article was originally published by The Scotsman.
This information is obtained from sources considered to be reliable, but its accuracy and completeness is not guaranteed by Anderson Strathern Asset Management Limited. Neither the information nor any opinions expressed constitute financial advice. Investments can fluctuate in price, value and/or income and may return less than the original amount invested. Past performance is not necessarily a guide to future performance.
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