Richard Johnston – Financial Planner
Significant changes to the taxation of interest and dividends are being introduced by HMRC from 6 April 2016. All rates and allowances noted relate to those applying for the 2016/17 tax year and exclude special circumstances such as charitable/pension contributions and personal allowance reductions.
The main source of interest for private individuals is typically bank accounts, but interest is also often received in respect of certain investment funds (typically those focusing on fixed interest securities).
Interest is normally taxable at the same rates as apply to salary and rental income – being 20%, 40% or 45%. Where the interest is covered by the Personal Allowance or is derived from funds held in an ISA, no tax is payable.
In addition, a new ‘Personal Savings Allowance’ (not to be confused with the ‘Personal Allowance) will be introduced from April 2016 and will result in most individuals paying no tax on their savings interest (given that interest rates are at historically low levels). This allowance will be set at the following rates:
Presently, banks automatically deduct 20% tax from interest from most savings accounts, but will cease doing so from 6 April 2016. As most individuals will benefit from the new Personal Savings Allowance, this will ensure that their tax liability is dealt with correctly, but, for some, this will not be the case. In some instances, therefore, it may be necessary to complete tax returns to account for the tax due.
From April 2016, all individuals will receive the first £5,000 of dividends at a 0% tax rate (we purposely do not state ‘tax-free’, as these dividends may still affect entitlement to the personal allowance, Child Benefit etc.), but tax will be applied to excess dividends regardless of the person’s taxpayer status. The current system of ‘grossing up’ dividends will also cease to apply. The rates to apply are shown below:
The consequence of this is that basic rate taxpayers with dividends exceeding £5,000 (but dividends deriving from ISA or pension funds can be ignored) will be due tax and may need to complete tax returns, if they are not already doing so. Some higher/additional rate taxpayers may, however, have a reduced tax liability as a result of the change and, in some instances, will be able to cease completing tax returns.
This note has been provided for guidance and it is essential to seek professional advice in relation to all these matters as the tax treatment depends on the individual circumstances of each client. Murray Asset Management UK Limited can accept no responsibility for any loss caused by any action or omission based on the contents of this note.