2016 – Budget Recap

ISA’s

The ISA allowance will rise to £20,000 for the 2017/18 tax year. For this tax year, 2016/17, the allowance remains at £15,240.
From 6 April 2017, the government will introduce a Lifetime ISA for savers under age 40. This will give eligible savers the opportunity to save flexibly over the long term for a home/retirement. It’s also intended as a flexible alternative to pensions for the self-employed. The maximum contribution a person can make is £4,000 per year to benefit from the government bonus and is counted as part of the overall ISA limit.

Capital gains tax to fall

From April 2016, the higher rate of capital gains tax is 20% and the lower rate 10% (previously 28% and 18%). Capital gains tax applies when you sell investments at a profit and exceed your capital gains allowance, currently £11,100. This reduction will not apply to gains made on residential property (e.g. second homes and buy-to-let). The government is trying to reduce the use of residential properties as an investment vehicle.

Changes to tax thresholds

The personal allowance, the amount of income you can receive before paying tax, will rise from £11,000 in 2016/17 to £11,500 in 2017/18. The level of income at which you start paying 40% tax will also rise to £45,000.

Automatic deduction of income tax on savings income

The tax rules are changing so that interest from OEICs, authorised unit trusts and investment trust companies can be paid without deduction of tax from April 2017.

Other Changes

Tax Credits on Dividends

April 2016 saw the current system of tax credits on dividends abolished and replaced by a simpler system. All individuals will be able to receive £5,000 of dividend income with no tax liability at all.

So, if your entire income is £16,000 or less, you will pay no dividend tax at all.

Three new dividend tax bands will be created, and will apply to all dividend income in excess of £5,000 per year. Dividend income above £5,000 will be taxed according to your rate of tax. These bands are 7.5% (basic rate tax payer), 32.5% (higher rate tax payer) and 38.1% (additional rate tax payer).

Personal Savings Allowance

In last year’s Budget the Chancellor announced the introduction of a personal savings allowance coming into effect April 2016. This means every basic-rate taxpayer will be able to earn £1,000/year in savings interest before paying any tax on it (and that higher-rate taxpayers will be able to earn £500).