What’s changed in the Tax World 16/17
The start of the new tax year brings a raft of changes that have consequences for your personal finances.
And with so much change afoot, it can be difficult keeping up with what's going on.
To make things a little easier to digest, here's a list of the major changes you simply can't afford to ignore.
The tax-free personal allowance is going up: This is the amount of money you are allowed to earn before income tax becomes payable. It's rising to £11,000, up from £10,600. It will rise again to £11,500 the following year - on 6 April 2017. Think of any increase in the personal allowance as a pay rise!
The 40p tax threshold will rise too: The amount of money you can earn before having to pay the higher-rate of income tax (40 per cent) increases to £43,000. This is an improvement from £42,385 in the 2015/16 year. It will rise again in April 2017 to £45,000 and the Government says it is committed to raising it further, to £50,000 by 2020.
The marriage allowance is improving (slightly): from £1,060 to £1,100. This means lower earners are able to transfer £1,100 of their tax-free personal allowance to their partner therefore reducing their tax bill.
To benefit, you need to have an income of £11,000 (the new personal allowance) or less and your partner must be a basic-rate taxpayer whose income is between £11,001 and £43,000.
You must transfer £1,100 exactly - not more or less.
HM Revenue and Customs gives your partner the extra allowance by changing their tax code (usually to 1166M, which can take up to two months) or when they send their self-assessment tax return if they’re self-employed.
You can apply for the marriage allowance and find more information here.
Stamp duty is going up for landlords and those buying second homes: They will face a 3 per cent surcharge on the existing price bands from 1 April 2016. (See the box opposite for the full list of charges.)
Wear and tear allowance is going: The allowance allowed landlords to offset 10 per cent of their rental income against tax for maintenance, regardless of whether they carried out any repairs or not. From April 2016, they will only be able to claim for maintenance they can prove has taken place. That means that careful record keeping of receipts and invoices is essential. The government says the measure will have effect for expenditure incurred on or after 1 April 2016 for corporation tax payers and 6 April 2016 for income tax payers. This applies to all residential lets, furnished or not but not to Furnished Holiday Lets or Rent a Room relief
Personal savings allowance launches: From 6 April, individuals with taxable income of between £17,000 and £43,000 a year will be eligible for a £1,000 tax-free allowance, meaning they can earn up to £1,000 per year in savings income without paying a penny of tax. Higher-rate taxpayers who have taxable income of between £43,001 and £150,000 will also receive an allowance, but it is capped at the lower amount of £500 per year.
Isa allowance frozen: It remains at £15,240, while the Junior Isa (and child trust fund) allowance stays at £4,080.
Lifetime allowance reduction:
You usually pay tax if your pension pots are worth more than the lifetime allowance. This is currently £1.25 million, but will be reduced to £1 million from 6 April 2016.
The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you. The rate is 55 per cent if you get it as a lump sum and 25 per cent if you get it any other way.
Tapered annual allowance: The size of the annual allowance will be gradually reduced from £40,000 to £10,000 for those making between £150,000 and £210,000 a year.
National insurance 'contracting out' to end: From 6 April, individuals will no longer be able to contract out of the additional state pension (also known as second State Pension or SERPs). It allowed those paying into a company pension scheme (usually a defined benefit scheme) to pay a reduced rate of national insurance or have it paid into a private pension.
The end of contracting out means those who previously qualified for a reduced rate by way of a 1.4 per cent rebate will pay more national insurance.
You can tell if you’re contracted by checking a recent payslip and looking at the national insurance line. If you’re contracted out if it has the letter D, E, L, N or O next to it. You’re not contracted out if it has the letter A.
New dividend tax allowance: This is also brand new and will affect all individuals in receipt of dividends, either from a company as part of a remuneration strategy or from investments that are not held within an ISA or pension.
Dividend tax credit rules replaced with a tax-free allowance: which entitles all individuals to the first £5,000 of income from dividends each tax year free from taxation.
Dividends over this level will be subject to tax and for basic-rate taxpayers this will be 7.5 per cent, higher-rate taxpayers will pay 32.5 per cent and additional-rate taxpayers will pay 38.1 per cent.
Remember that you no longer need to ‘gross up’ dividends before putting them onto your return
Tax-Free Childcare scheme: From early 2017, working parents can get up to £2,000 a year, per child, in tax relief to help cover childcare costs. It replaces the existing system that sees parents buy 'childcare vouchers' from their employer that enable each parent to pay for childcare worth up to £243 a month.
Each £243 voucher costs the parent £165.24. For higher-rate taxpayers who can only buy vouchers of £124, the cost is £71.92. For additional-rate taxpayers, their £110 voucher costs £58.30. Each parent can sign up to the voucher scheme (as long as their employer offers it).
However, once the new scheme comes in, you won’t be able to sign up to both schemes. If you're in the old one, you don’t have to switch over. But once you’ve moved to the new one, you won’t be able to move back again.
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And please be aware that this is ‘general’ information designed to give you a quick overview and this information may not apply to everyone in every circumstance so please do you own due diligence or take professional advice and do not rely on the information in this blog post