A year on from the biggest shake-up since the Retail Distribution Review, April 2016 will see a rash of new tax rules take effect, which providers and advisers must have on their radar.
First among these is the personal savings allowance, which will see basic rate taxpayers receive the first £1,000 of interest tax-free and higher rate taxpayers the first £500.
When the change takes effect from 6 April, banks and building societies will stop automatically taking 20 per cent in income tax from interest earned on non-Isa savings.
Alistair Wilson, head of retail platform strategy at Zurich, told FTAdviser the government has not yet decided whether platforms will be required to pay gross interest on money sitting in cash, but advisers should keep a watchful eye on the debate to make best use of tax wrappers for clients.
Another issue coming in the Spring is to do with changes to dividend taxation, with the new tax-free allowance replacing the dividend tax credit rules, which will affect the taxation of unwrapped investments on platforms.
“From April 2016, investors will not pay any tax on the first £5,000 of income they receive from dividends,” said Mr Wilson. “Dividend income over this amount will be taxed at 7.5 per cent for basic rate payers, 32.5 per cent for higher rate payers and 38.1 per cent for savers in the additional rate band.”
Half-yearly statements and consolidated tax statements produced by platforms will need to be altered, which should make completing tax returns simpler for clients, while advisers will need to pay greater attention to the funds that pay interest and those that pay dividends.
“Given the large volume of cash being pumped into multi-asset style funds, this will be particularly interesting for assets held outside of Isas and pensions, identifying which funds pay interest distributions and which funds pay dividend distributions,” noted Mr Wilson.
“So for clients looking to leverage their income from different pots as they drift into retirement this becomes more interesting, accepting it will principally be the high net worth individuals with unwrapped assets who will be affected.”
Danny Cox, a chartered financial planner with Hargreaves Lansdown, commented that neither the new personal savings allowance, nor the new dividend tax rules, are widely understood by the general public.
“Advisers need to help their clients understand the changes and how they can arrange their financial plans to make the best use of these tax breaks.
“Amongst the biggest losers will be those who draw dividends as part of a remuneration strategy - after the first £5,000 of dividend income, their rate of tax paid goes up. It still makes sense to use dividends as the overall tax rate should be lower than the combined income tax and national insurance.”
He added that the tax breaks of pensions become relatively more attractive for those who are able to contribute via their employer.
Les Cameron, technical manager at Prudential, said that the personal tax changes are not that big a deal for most providers and it’s more about ensuring advisers understand the changes coming next April.
“It’s all planning stuff - how our products are taxed, updating the marketing literature - both these changes should actually make our products more popular.”
In preparation for the dividend tax changes, Prudential have actually developed a tool to help business owners work out how to best extract profits and pay themselves.
It allows users to review and alter their current remuneration structure to understand how this impacts factors such as income after taxation, the retained business profit, pension contributions and the tax payable to HM Revenue & Customs.
Mr Cameron added that the dividend tax changes will hit small business owners hard, especially those who are currently using the popular strategy of relying heavily on shareholder dividends from their business to supplement a small salary.
“As a result many business owners will want to rethink their current remuneration strategy which also creates the perfect opportunity for financial advisers and accountants to help them look at how they will fund their future income needs too.”
Fully flexible Isas are also set to land next April, allowing investors to withdraw cash and replace it in the same tax year, without impacting their annual Isa allowance.
Platforms will need to adapt their systems to allow clients to make additional payments over and above the annual limits, as well as ensuing reporting to clients and HMRC reflects this.
Advisers will need track movements of cash in and out of Isas and help clients decide on the best course of action.
Mr Cox pointed out that the Flexible Isa will apply to both cash and stocks and shares versions. “Isa managers do not have to offer the flexible facility and where a stocks and shares Isa provider does offer the option, it can only be exercised from cash held.”
This week’s Autumn Statement avoided adding too many more tax changes to the mix, although buy-to-let investors are set to be hit by a 3 per cent increase in stamp duty, as the chancellor sought to tackle the issue of second homes bought by those who live overseas from 1 April 2016.
peter.walker@ft.com
