INCOME TAX - 24.02.2016

Introducing the new tax allowances

New tax allowances and rate. You’re probably aware that new rules and tax rates will apply for 2016/17 to dividends and certain other types of investment income, principally deposit account interest and government stocks and bonds. There will be a dividend nil rate band (DNRB) and the personal savings allowance (PSA).

Unclear rules. Since the DNRB and the PSA were announced there’s been confusion over how they would fit in to the calculation of tax liability, which has become increasingly complex in recent years. This ought to have been cleared up by the draft Finance Bill 2016 which was published in December 2015, but the clauses were rather tricky to follow and so HMRC had to publish clarification.

Separate allowances. The PSA is a maximum of £1,000 for basic rate taxpayers and £500 for those who pay at the higher rate (it’s zero for additional rate taxpayers). The DNRB is £5,000 for all taxpayers. These two new allowances don’t interact, i.e. each can only be used against the type of income to which it relates and neither affects the amount of the other you’re entitled to. However, where you use any of either allowance it also uses part of your basic rate tax band (see The next step ).

Tax planning. The introduction of the PSA raises a question over whether you should rethink your ISA investments. After all, if you can receive up to £1,000 bank or building society interest tax free why bother with an ISA on which you’ll have to pay admin charges?

Tip. ISAs still make good sense because you can build up significant savings on which all the interest is tax free. However, because interest rates in ISAs are usually low compared with, say, a high interest term account, it also makes sense to open one of these to take advantage of your PSA, especially if you’re a basic rate taxpayer.

For an example of how the PSA and DNRB will affect your tax bill, visit http://tipsandadvice-tax.co.uk/download (TX 16.10.01).