Harmonea Update – Two key tax changes for 2016/2017
After all the hoo-haa of the recent budget, it’s sometimes important to remember that many things announced don’t take effect for a few years. We are about to be hit by two tax changes for last years budget – Dividend Tax Relief and Savings Credit.
Dividend Tax Relief
The changes to the tax regime announced in last years budget for Dividends will have an impact of anyone who owns a family company and uses dividends as a way of drawing money out or those who rely on substantial dividends in retirement.
What is changing? After Advance Corporation Tax (ACT) was removed by Gordon Brown in 1999 a system of dividend tax credit was introduced. As Dividends are paid out of Limited Companies taxed profits, there was no further tax to pay unless the dividends took you into the higher rate tax band in which case additional tax of 12.5% was charged.
The new rules mean that dividends are taxable in at 7.5%/32.5% or 38.1% depending on your ultimate tax band. The chancellor has given all tax payers a £5,000 allowance. To see the effect of this new tax in action, consider a business owner who wishes to withdraw £30,000 a year. Traditonally we would advise taking a salary up to the tax free limit of £10,000 and £20,000 of dividends. For 2015/16 this would result in an overall ni charge of £493.34 (although this can be reduced by £260.54 if you qualify for Employers Allowance).
In contrast for 2016/17 the combines tax & NI charge would be £1,543.34, the difference being the new £1,050 dividend tax. As you can see the effect is pronounced and if you are thinking of paying a dividend doing so before 6 April 2016 may be tax advantageous.
If you are unsure in any way of how you will be affected by this new tax, or if you can pay yourself a dividend please contact us.
Personal Savings Allowance
Another item introduced by Mr Osborne in last year’s budget was the concept of a Personal Savings Allowance. Basic rate tax payers will be able to earn £1,000 interest before paying tax. Higher rate tax payers have an allowance of £500. In order to earn £1,000 in a typical instant access account you would need over £75,000 saved. Bank and Building societies will start to pay interest gross without the deduction of tax.
Whilst this is no doubt good news for savers, please remember if HMRC send you a Notice to File A Tax Return you are required to do so to avoid an automatic £100 fine even if you have no tax to pay.