RegulationApr 6 2016

What you must know about today’s tax changes

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What you must know about today’s tax changes

Today (6 April) marks the first day of the new fiscal year, traditionally a time for the government to begin various new financial initiatives and tax structures.

Here is a quick rundown of what tax changes are taking place from today and what your clients need to do:

1) New personal allowance

The new tax year will see the personal savings allowance set at £11,000 within the basic rate tax band of £32,000 - meaning the majority of the working population can earn up to £43,000 without entering the higher tax bracket.

Similarly, if an individual has savings that are subject to income tax, then the first £1,000 will be tax free; creating a further saving of £200.

It is also possible to receive a further £5,000 in dividends without paying additional tax, according to Eric Clapton, managing director of chartered accountancy firm Clapton Consultants.

“The new allowances need to be absorbed into a client’s financial planning from the beginning of the tax year,” stated Mr Clapton. “With good advice it is quite possible for a couple to pay no tax on non-Isa savings of £400,000 and receive income of almost £100,000 without paying higher rate tax.”

Stuart Hulme, director of savings at Hampshire Trust Bank, pointed out while HMRC has confirmed it will collect the money by adjusting tax codes, based on interest earned in the previous year, the detail is not yet clear.

“What is certain is savers who earn interest above their personal savings allowance, which, in terms of basic rate tax payers will typically impact those saving £69,000 or more in the top interest paying easy access savings account, could be in for a period of confusion about their tax liability and will need to check they are not overpaying, or indeed underpaying,” he said.

“We are calling for more information to be made available to savers to help ensure they are managing their affairs correctly and are not faced with any unexpected charges.”

2) Isa time

Today marks the launch of the Innovative Finance Isa, allowing savers to earn tax-free interest from peer to peer lending.

Richard Harwood, director at the Innovative Finance Isa website, said P2P lending has already provided more than £5bn of funding to smaller companies that would have otherwise struggled to borrow money from the high street banks.

He said: “If investors opt to lend to these businesses through the new Isa, this figure will rise significantly and the impact on British business - in particular SME growth - could be monumental.”

Those still favouring more classic Isa structures are reminded investing a lump sum into their allowance at the start of the 2016 to 2017 tax year will benefit from a whole year of compound returns, resulting in considerably greater returns than if they were to invest at the end of the tax year, or drip feed throughout.

Nutmeg chief executive Nick Hungerford said: “Our calculations show if you’d invested £10,000 in a medium-risk portfolio for each of the past 10 years - on day one instead of at the last minute - you could have accrued more than £3,478 in additional returns.

£10,000 invested each year for the past 10 yearsPortfolio size
Investing on the first day of the new tax year£133,074
Investing one 12th at the start of each month£127,930
Investing on the last day of the tax year£129,596

3) Dividends and CGT

As announced and then swiftly enacted in last month’s Budget, capital gains tax has been cut from 28 per cent to 20 per cent, while the basic rate fell from 18 per cent to 10 per cent.

George Bull, senior tax partner at RSM, pointed out following these changes, most investors would be wise to wait to sell assets - other than residential property or carried interest - until after 6 April.

He also noted one of the most significant changes from today is the taxation of dividends.

He said: “A dividend of £50,000 taken before 6 April will cost £12,500 in tax for a higher-rate taxpayer and £15,278 for an additional-rate taxpayer. After 6 April, a £50,000 dividend will incur a tax liability of £14,625 for a higher-rate taxpayer and of £17,145 for an additional-rate taxpayer.”

Paying a dividend before 6 April will accelerate by a year the date on which the tax is payable and consideration also needs to be given to the effect on payments on account for 2015 to 2016 (and 2016 to 2017) of paying a dividend pre-year-end, especially if a claim to reduce 2015 to 2016 payments on account has already been made, stated Mr Bull.

4) New state pension

Last, but by no means least, the much-maligned new state pension is also going live today.

Someone with 35 years of full rate national insurance contributions will now be entitled to a single state pension of £155.65 per week, or £8,093 a year.

Aegon pointed out due to historically low interest rates and improved life expectancy, annuity rates are currently at an all-time low, meaning if someone wished to buy an equal amount from a private pension fund, a male at age 65 would need a fund of £243,000 and a female who currently has a state pension age of 63 would need £264,500.

The provider’s pensions director Steven Cameron stated: “With all the controversy over winners and losers and complicated transitional arrangements, people may be forgiven for not realising just how valuable a benefit it will be.

“The introduction of the new single state pension should be a prompt for people to review their retirement aspirations against what they will receive from the state and then act to begin plugging any gap.”

Andrew Sheen, editor of online retirement community www.retiresavvy.co.uk said new pensioners will need to halve the cost of their living with the introduction of the new state pension.

He said: “Although the New State Pension that comes in from 6 April is more generous than the system it replaces, it is still less than half of what the average 50 to 65 year-old currently needs to live on.”