A new tax-free savings allowance, an overhaul of dividend tax rates and cuts to pension allowances are among a raft of changes kicking in when the new tax year starts this week.
Investors will also benefit from lower capital gains tax (CGT) rates from 6 April, while the launch of the innovative finance Isa widens the tax-free options available to savers.
They are among a range of tax measures taking effect following announcements in the Autumn Statement and the three Budgets that have taken place since early 2015.
That will pose a challenge for some, with several of the new opportunities for savers and investors carrying a potentially nasty sting in the tail.
Here we run through the main changes coming into force on 6 April.
The lifetime allowance (LTA), which reached a high of £1.8 million in 2011, falls from £1.25m to £1m, dragging more people with sizeable pension pots into the 55 per cent tax trap that lurks above the limit. Transitional protection will be available from 6 April, in the form of Individual Protection 2016 and Fixed Protection 2016.
“Anyone may opt for Fixed Protection if they think they will be impacted by the reduction in the LTA either now or in the future,” said Richard Libberton, private wealth manager at Anderson Strathern Asset Management.
“In return for forsaking further pension contributions, HMRC will allow the saver to retain a protected LTA of £1.25m.”
There will also be new restrictions on the annual pension allowance (the maximum you can save into a pension each year while still benefiting from tax relief). It will be tapered by £1 for every £2 of income above £150,000, leaving those with income of £210,000 and above with a reduced annual allowance of £10,000.
The 10 per cent tax credit on dividends is being replaced by a new £5,000 tax-free dividend allowance, above which dividends will be charged at 7.5, 32.5 and 38.1 per cent (for basic, higher and additional rate taxpayers respectively).
Under the system ending on 5 April there’s no income tax on dividend income for basic rate taxpayers, but there’s a 25 per cent charge for higher rate taxpayers and 30.5 per cent for those on the additional rate. Basic rate taxpayers receiving dividends of more than £5,001 in the tax year will need to enter the self-assessment system to pay the tax charge they face.
“The sting in the tail is that once the dividend allowance has been used up, taxpayers at every bracket will face an effective tax increase of 7.5 per cent on their dividend income,” said Vishal Chopra, head of tax at Grant Thornton Scotland.
“Therefore those looking for investment returns via dividend income, or entrepreneurs extracting value from their business in this way, are likely to be worse off.”
Chopra added: “Tax should rarely be the main driver behind investment decisions but is a key factor to be considered.”
Personal savings allowance
Some 95 per cent of savers will no longer have to pay tax on their savings interest, under a new allowance that will allow basic rate taxpayers to receive £1,100 in savings interest tax free. Higher rate taxpayers get a reduced allowance of £500 a year.
The allowance covers interest received from savings, bank and credit union accounts, corporate and government bonds and peer-to-peer (P2P) products.
”Interest that is already received tax-free won’t affect the savings allowance, meaning that Isa interest and Premium Bond winnings will not count against it,” Libberton noted.
Those that do receive more than £1,000 of interest will have pay tax on it through Paye or be pushed into the self-assessment system, as interest will no longer be taxed at source by the provider.
The individual personal tax allowance will increase from £10,600 to £11,000, before rising to £11,500 in April 2017.
The threshold above which the 40 per cent higher rate of tax kicks in will jump from £42,385 to £43,000, with a further increase to £45,000 pencilled in for April 2017, following the recent Budget.
The launch of the innovative finance Isa will allow peer-to-peer lending products and some crowdfunding investments to be held in Isas for the first time.
Savers using P2P platforms still won’t have the protection of the Financial Services Compensation Scheme (FSCS) unless they invested following a personal recommendation by a financial adviser.
Isas will also become more flexible from 6 April, with savers permitted for the first time to take money from an Isa and put it back in later without affecting the annual limit, provided it’s replaced in the same year as the withdrawal. If it’s paid back in during the following tax year, it will count towards that year’s allowance.
The annual Isa allowance remains unchanged at £15,240, before rising in April 2017 to £20,000.
Capital Gains Tax (CGT)
The top and basic rates of CGT charged above the annual exemption of £11,100 will fall from 28 and 18 per cent to 20 and 10 per cent respectively, under changes set out in the 2016 Budget.
Gains on the sale of a principal private residence (ie main home) will remain exempt, but proceeds on other property sales, including buy-to-let, will still be charged CGT at the current rates.
“If you have already made gains above the exemption, it may be worth disposing of loss-making investments before the end of the tax year to offset against the gains,” said Libberton. “But any large disposals could be delayed until the new tax year to benefit from the lower rates of tax.”