In the March Budget 2015 the Chancellor announced a new tax-free Personal Savings Allowance and Dividend Allowance, along with changes to dividend taxation, to apply from April 2016. This week draft legislation has been released giving a strong indication for how the allowances will work in practice when the changes come into force.
Personal Savings Allowance
From April 2016, the first £1,000 of an individual’s savings income (such as interest on bank deposits) will be tax-free. For higher rate taxpayers the allowance is lower at £500. Additional rate taxpayers will not have a Personal Savings Allowance.
Income from an ISA and income which qualifies for the 0% starting rate for savings will not use up any part of an individual’s Personal Savings Allowance.
As most (an estimated 95% of taxpayers) will not exceed the Personal Savings Allowance, banks and building societies will no longer have to pay interest after the deduction of basic rate tax from 6 April 2016.
From April 2016 there will be a new nil rate of income tax for dividends of up to £5,000 received by an individual each tax year. Above the £5,000 allowance, dividends will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
This replaces the current system where dividends are paid after the deduction of a notional 10% tax credit. The tax credit currently satisfies the tax liability for basic rate taxpayers, and higher and additional rate taxpayers can set it against their liability to tax on dividend income that year. The tax credit cannot be reclaimed within an ISA.