IN this month’s article I aim to provide concise updates on three key issues that may affect your finances and overall financial plan.
Starting with a summary of the recent changes to personal savings and dividend allowances that will come into force from the 2016-17 tax year and outlining how these have changed from previous tax years, I shall then outline the impending changes to UK
Inheritance Tax and how an additional allowance may be available if the family home is left as part of the estate.
Finally, I will provide an update on the recent reduction in the Deposit Protection Scheme Limit.
These topics have all attracted a lot of interest from clients in recent months. As ever, it is vital to keep abreast of these changes to ensure you can plan accordingly to keep your financial affairs as tax-efficient as possible.
The Personal Savings and Dividend Allowances
In April this year, a new tax-free Personal Savings Allowance is being introduced for savings income. This means that basic rate taxpayers will be able to receive up to £1,000 and higher rate taxpayers up to £500 of savings income without any tax being deducted or due.
The PSA will not be available to savers with additional rate income (i.e. income over £150,000).
Savings income includes bank interest, interest from fixed rate savings bonds, corporate bonds and gilts. It also includes gains from some types of life assurance bond.
When this is introduced, banks, building societies and National Savings will no longer deduct tax from the interest they pay. This means that in future, non-taxpayers will not have to register to receive gross interest on their savings.
Another allowance is a new Dividend Allowance – which means that for dividend distributions made in the new tax year, the old Dividend Tax Credit will be replaced by the new allowance. This will give individuals a new 0% tax rate on the first £5,000 of dividend income received in a tax year. Tax will be due on dividend income received over the £5,000 allowance and the rate of tax on dividend income will be charged as follows:
- 7.5% in the basic rate band
- 32.5% in the higher rate band
- 38.1% in the additional rate band
It is likely that only those with significant dividend income, or individuals who are able to pay themselves dividends in place of salary (such as company directors) will pay more tax than they would under the current system.
This change will reduce the incentive for company directors to take income as dividends rather than salary to reduce tax.
It must be borne in mind that although there will be no tax due on annual dividend income of up to £5,000 or savings interest of up to £1,000 (£500 for higher rate taxpayers), this income still has to be taken into account in the overall income calculation.
This is important as it can have effects such as meaning that taxable dividends fall into a higher tax band, or can lead to the loss of the personal allowance, child allowance or the full annual allowance for pension purposes.
Will these changes affect ISAs or pensions?
Some investors think they will receive more dividend income within their ISAs under the new rules – but they won’t. This is because they expect the abolition of the old dividend tax credit to mean that, after next year, dividends will be paid “gross”.
However, it is worth noting that this “credit” was entirely notional and could not be reclaimed in hard cash even within tax efficient vehicles such as ISAs.
Similarly, pension plans, whether occupational or personal, were also unable to reclaim the “tax credit” so nothing will change to the dividends they get.
Any dividends received won’t be taxed while they remain in the pension but will be taxable as pension income in line with existing rules when withdrawn by the pension saver. No £5,000 allowance will apply because the recipient of the dividend is the pension scheme, not the beneficiary.
Inheritance Tax on the family home
There has also been legislation introduced to provide for an additional main residence nil-rate band if the deceased’s interest in a property, which has been their home at some point and is included in their estate, is left to one or more direct descendants on death.
The value of the main residence nil-rate band for an estate will be the lower of the value of the property (after deducting any mortgage) or the maximum amount of the band. The maximum amount will be phased in as follows:
- £100,000 for 2017-18
- £125,000 for 2018-19
- £150,000 for 2019-20
- £175,000 for 2020-21
It will then increase in line with CPI for subsequent years. A direct descendant will be classified as a child of the deceased and their lineal descendants so this change will be of no use to those without children.
A claim will have to be made on the death of a person’s surviving spouse to transfer any unused proportion of the additional nil rate band in the same way that the existing nil-rate band can be transferred.
The main residence nil-rate band will be transferable where the second spouse or civil partner of a couple dies on or after 6th April 2017 irrespective of when the first of the couple died.
In addition, legislation will mean that where part of the main residence nil-rate band might be lost because the deceased had downsized to a cheaper property or had sold their home, that part will still be available provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants.
If the net value of the estate (before reliefs and exemptions) is above £2 million, the additional nil-rate band will be reduced by £1 for every £2 excess amount.
This means that by 2020/2021, anyone with a net estate over £2.35 million will have completely lost their additional nil-rate bank.
It is important to note that this new allowance does not reduce the tax payable on lifetime transfers even if they are chargeable as a result of death.
A reduction in the Deposit Protection Scheme Limit
Finally, if you have an account with an eligible bank or building society that becomes insolvent, you will be protected under the Financial Services Compensation Scheme (FSCS).
Until 31st December 2015, the limit for protection was £85,000 per individual but this has now reduced to £75,000.
Please remember that this is per individual for the institution, so cover the total of all of your accounts held with that bank.
While these aides-memoire can serve as a useful guide to help you keep abreast of these upcoming legislation changes, it is important that you always seek independent financial advice when looking at your holistic financial situation and various planning needs.
