Introduction of Dividend tax
From 6th April 2016 the existing system of grossing-up dividends by a notional tax credit will be abolished and will be replaced by a new tax on dividends.
Dividends will be taxed as follows:
First £5,000 will be tax-free
- Dividends in the basic rate tax band: 7.5%
- Dividends in the higher rate tax band: 32.5%
- Dividends in the additional tax rate: 38.1%
Currently, basic rate tax payers have no tax to pay on dividends as the tax credit covers their liability to basic rate tax. The effective rate of tax for higher rate taxpayers is 25% and the additional rate 30.6%.
The point at which the individual starts to pay higher rate tax is increased however under the new regime as the dividends will no longer be grossed up.
The £5,000 tax-free amount is per person.
Individuals who are basic rate taxpayers and receive dividends of more than £5,001 will be required to complete self-assessment tax returns from 2016/17.
We would encourage you to maximise your tax-free dividends in the current tax year subject to profits being available in your company.
2016-17 Dividend Tax Calculator
New Savings Allowance
A new Personal Savings Allowance is being introduced for basic rate and higher rate taxpayers from April 2016. If you are a basic rate taxpayer you will be able to earn interest up to £1,000 tax-free. If you are a higher rate taxpayer the allowance is £500.
Banks and building societies will therefore no longer deduct tax from interest at source. If you are required to pay tax on interest it will be paid either through your tax code or included in your self-assessment tax return.
The employment allowance which reduces the employer’s NI liability is to be increased from £2,000 to £3,000 from April 2016.
The allowance will however be withdrawn for companies where the director is the sole employee of the company.
If you are caught by IR35 you are not entitled to claim the employment allowance
The annual allowance for pension contributions is currently £40,000 regardless of your level of earnings.
From April 2016 however the annual allowance will be reduced for individuals with annual income in excess of £150,000. For every £2 over £150,000 an individual’s annual allowance will be reduced by £1 down to a minimum of £10,000. Anyone with income in excess of £210,000 will therefore only be able to contribute £10,000 to a pension plan.
Travel and subsistence expenses
From April 2016 contractors working inside IR35 will no longer be able to claim for travel and subsistence expenses. The restrictions only apply to contractors that are under the supervision, direction and control of their end-client which is essentially those inside IR35.
Contractors working outside of IR35 will not be affected by the proposed changes however the temporary location rules will continue to apply.
Clients who also have rental income should be aware of the following changes:
From April 2016 the wear & tear allowance currently available on fully-furnished properties is to be replaced with a new relief that allows all residential landlords to deduct the actual cost of replacing furnishings.
From April 2017 the amount of income tax relief landlords can get on residential property finance costs will be restricted to the basic rate of income tax. Landlords will therefore no longer be able to deduct all of their finance costs from their property income but will instead receive a basic rate reduction from their income tax liability for their finance costs.
This change will be introduced gradually from April 2017 over a four-year period. The restrictions will not apply to landlords of furnished holiday lettings or to properties owned by corporates.