Personal tax

The personal allowance

For those born after 5 April 1938 the personal allowance is currently £10,600. Those born before 6 April 1938 have a slightly higher allowance. The Chancellor announced in the Summer Budget that the personal allowance will be increased to £11,000 for 2016/17 and to £11,200 in 2017/18.

The government has an objective to raise the personal allowance to £12,500 by the end of this Parliament.

Not everyone has the benefit of the full personal allowance. There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000 which is £1 for every £2 of income above £100,000. So for 2015/16 there is no personal allowance where adjusted net income exceeds £121,200.

Tax bands and rates

The basic rate of tax is currently 20%. The band of income taxable at this rate is £31,785 so that the threshold at which the 40% band applies is £42,385 for those who are entitled to the full basic personal allowance.

The Chancellor has previously announced that the basic rate limit will be increased to £32,000 for 2016/17 and to £32,400 for 2017/18.

The higher rate threshold will therefore rise to £43,000 in 2016/17 and £43,600 in 2017/18 for those entitled to the full personal allowance.

The additional rate of tax of 45% remains payable on taxable income above £150,000.

Taxation of savings income

Currently, some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. The government has confirmed that the £5,000 band will be kept at the same level for 2016/17. The rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.

The Chancellor announced in the March Budget that a Personal Savings Allowance would be introduced for income such as bank and building society interest from 6 April 2016.

The Personal Savings Allowance will apply for up to £1,000 of a basic rate taxpayer’s savings income, and up to £500 of a higher rate taxpayer’s savings income each year. The Personal Savings Allowance will not be available for additional rate taxpayers.

Comment

The current 0% starting rate does not apply to many people as income, such as a salary, exceeds the total of the personal allowance (£10,600) and the starting rate limit of £5,000. The Personal Savings Allowance will however be of benefit to all basic and higher rate taxpayers.

The government estimates that around 95% of taxpayers will not pay any tax on interest received.

Taxation of dividend income

Currently, when a dividend is paid to an individual, it is subject to different tax rates compared to other income due to a 10% notional tax credit being added to the dividend. So for an individual who has dividend income which falls into the basic rate band the effective tax rate is nil as the 10% tax credit covers the 10% tax liability. For higher rate (40%) and additional rate (45%) taxpayers, the effective tax rates on a dividend receipt are 25% and 30.6% respectively.

To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.

From 6 April 2016:

• the 10% dividend tax credit is abolished with the result that the cash dividend received will be the gross amount potentially subject to tax
• a new Dividend Tax Allowance charges the first £5,000 of dividends received in a tax year at 0%
• for dividends above £5,000, new rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Comment

Many individuals do not have £5,000 of dividend income so are potential winners in the new regime. The removal of any tax on dividends up to £5,000 increases the attractiveness of holding some investments which provide dividend returns rather than interest receipts. Use can then also be made of the CGT annual exemption by selective selling of investments.

Basic rate taxpayers need to appreciate that all dividends received still form part of the total income of an individual. If dividends above £5,000 are received, the first £5,000 will use up some or all of the basic rate band available. The element of dividends above £5,000 which are taxable may well therefore be taxed at 32.5%.

Individual Savings Accounts (ISAs)

In 2015/16 the overall ISA savings limit is £15,240 and this level will be maintained for 2016/17.

Two changes are proposed with effect from 6 April 2016.

• Changes will be made to the existing ISA Regulations to establish a new flexibility within ISAs which allows savers to replace cash they have withdrawn from their account earlier in a tax year, without this replacement counting towards the annual ISA limit for that year. This flexibility will be available in relation to both current year and earlier years’ ISA savings where provided for in the terms and conditions of a ‘flexible ISA’.
• The government will introduce a third ISA, the Innovative Finance ISA, for loans arranged via a peer to peer (P2P) platform.

Following a public consultation, the list of ISA eligible investments will be extended in autumn 2016 to include debt securities offered via crowdfunding platforms. This will form part of the Innovative Finance ISA. The government will also explore the case for extending the list to include equity crowdfunding.

Lastly, where a deceased person’s estate includes ISAs, the government will legislate to allow the tax advantages to continue whilst the estate is in administration.

Help to Buy ISA

The government announced the introduction of the Help to Buy ISA in the March Budget. The scheme will provide a government bonus to each person who has saved into a Help to Buy ISA at the point they use their savings to purchase their first home. For every £200 a first time buyer saves, the government will provide a £50 bonus up to a maximum bonus of £3,000 on £12,000 of savings.

Help to Buy ISAs will be available for first time buyers to start saving into from 1 December 2015. First time buyers will be able to open their Help to Buy ISA accounts with an additional one off deposit of £1,000.

Tax credits

A number of changes to tax credits and Universal Credit were announced in the July Budget but the Chancellor has scrapped some of the changes following a defeat of the proposals by the House of Lords.

The government has confirmed that:

• The rate at which a tax credit claimant’s award is reduced as each pound of their income exceeds the income threshold (known as the taper rate) will remain at 41% of gross income from April 2016.
• The level of income at which a claimant’s tax credit award begins to be tapered away (known as the income threshold), will remain at £6,420 per year from April 2016. Claimants earning below this amount will retain their maximum award. Consequently the income threshold for Child Tax Credit-only claimants will remain at £16,105 in 2016/17.
• As announced at Summer Budget 2015, the income rise disregard in tax credits will reduce from £5,000 to £2,500. This is the amount by which a claimant’s income can increase in-year compared to their previous year’s income before their award is adjusted.

The changes to Universal Credit announced at Summer Budget will go ahead as planned from 2016/17.

Comment

There are two types of tax credits; Working Tax Credit (WTC) and Child Tax Credit (CTC). The CTC is potentially available to families who have responsibility for one or more child.

The Universal Credit is gradually being introduced. It is a new type of benefit replacing six existing benefits – income-based jobseeker’s allowance, income-related employment and support allowance, income support, housing benefit, WTC and CTC.

New Tax-Free Childcare scheme

In Budget 2013, the government announced new tax incentives for childcare. This scheme is expected to launch in 2017.

Under the scheme the relief will be 20% of the costs of childcare up to a total of childcare costs of £10,000 per child per year. The scheme will therefore be worth a maximum of £2,000 per child (£4,000 for a disabled child).

The government has announced changes to the conditions to qualify for Tax-Free Childcare. All parents in the household must:

• meet a minimum income level based on the equivalent of working 16 hours a week at the National Living Wage (increased from eight hours at the National Minimum Wage)
• each earn less than £100,000 a year (reduced from £150,000), and
• not already be receiving support through tax credits or Universal Credit.

The current system of employer supported childcare will continue to be available for current members if they wish to remain in it or they can switch to the new scheme. Employer supported childcare will continue to be open to new joiners until the new scheme is available.

It is proposed that parents register with the government and open an online account. The scheme will be delivered by HMRC in partnership with National Savings and Investments, the scheme’s account provider. The government will then ‘top up’ payments into this account at a rate of 20p for every 80p that families pay in.

Free childcare

From September 2017 the free childcare entitlement will be doubled from 15 hours to 30 hours a week for working parents of 3 and 4 year olds. The government will implement this extension of free hours early in some local areas from September 2016. This free childcare is worth around £5,000 a year per child. The 30 hours free childcare offer for working parents of 3 and 4 year olds has been extended to help families maintain childcare arrangements and support the transition back to work at the end of their parental leave or period of ill health.

Pensions – restriction on tax relief

In the Summer Budget, further restrictions were announced to the amount of Annual Allowance that would be available to individuals. The Annual Allowance provides an annual limit on tax relieved pension savings. It is currently £40,000 (although some individuals may be entitled to a higher figure due to transitional provisions). From 6 April 2016 the government has introduced a taper to the Annual Allowance for those with adjusted annual incomes, including their own and employer’s pension contributions, over £150,000. For every £2 of adjusted income over £150,000, an individual’s Annual Allowance will be reduced by £1, down to a minimum of £10,000.

The government also wants to make sure that the right incentives are in place to encourage saving into pensions in the longer term. The government therefore launched a consultation in July 2015 on whether there is a case for reforming pensions tax relief. The government is considering the responses received and will publish a response at Budget 2016.

Secondary market for annuities

The government will remove the barriers to creating a secondary market for annuities, allowing individuals to sell their annuity income stream. The government will set out further details on this measure, including the framework for the consumer protection package, in its consultation response this December.

State pension

The state pension will rise in April 2016 by £3.35 to £119.30 per week. In addition the ‘triple lock’, which ensures that the state pension rises in line with the highest of the growth in prices, average earnings or 2.5%, will be maintained.

The new single-tier state pension will be set at £155.65 per week from April 2016.