With the end of another tax year fast approaching many will be considering whether any action should be taken before 5 April to mitigate their tax liabilities for the year. Whilst we should not forget the usual year end planning points, such as using ISA allowances, the 2016/17 tax year has a number of new complexities that should not be overlooked.
6 April 2016 saw a fundamental change to the taxation of dividends. With the abolition of the 10 per cent dividend tax credit came the introduction of the new dividend allowance. Individuals can now receive dividend income of up to £5,000 before any income tax is payable. Those owning family companies should consider if the payment of a dividend is appropriate to maximise the use of this allowance.
A second fundamental change is that, in addition to a £5,000 starting rate band of 0 per cent, savers can also receive £1,000 of interest before tax is due if they are a basic rate tax payer, reducing to £500 for a higher rate tax payer, and £nil for additional rate tax payers. Ahead of the new tax year couples should consider how interest bearing assets are held, to ensure that both spouses are fully utilising the savings rates and allowances available to them going forward.
What should be remembered is that whilst the above allowances can give rise to tax savings, income covered by these allowances still counts as taxable income utilising part of the basic rate tax and higher rate tax bands, and in determining the available personal allowance. This is an added complexity for those who actively manage levels of income, perhaps for themselves and their spouse to ensure that both personal allowances and basic rate tax bands are fully utilised.
The legislation now includes a seven step plan detailing how to calculate an individual’s tax liability, incorporating these new tax rates and allowances. Careful planning can give rise to opportunities to maximise the use of the starting rate band, savings and dividend allowances, even for those with substantial income. The downside, of course, being that just a small amount of additional income can give rise to a significant increase in the final tax bill if it results in rate bands being used up and allowances being lost.
For more information please get in touch with Joan Foster, or your usual RSM contact.