Investment income tax changes

22nd April 2016

There have been several changes this tax year that will affect a considerable number of taxpayers.

Everyone will now get a £5000 tax free dividend allowance, this is good news for higher rate taxpayers with a small amount of dividend income - potentially saving up to £1250. However, if you receive dividends in excess of this allowance you could well see an increased tax liability with dividends now being taxed at 7.5% for basic rate (previously tax free) and 32.5% for higher rate tax payers (an increase of 7.5%). This change particularly affects small business owners that previously took an income of up to £43000 via a mix of dividend and salary, effectively tax free, but would now incur a tax charge of up to £2025.

Savings income has also changed with banks now paying interest gross rather than deducting 20% tax at source. Again, this is good news for most, however,  if you are employed and you earn interest in excess of the tax free amounts (£1000 for basic rate taxpayers and £500 for higher rate taxpayers) you will need to ensure that the additional tax is collected through your PAYE by checking the ‘untaxed interest’ figure on your code is correct. An incorrect estimate could lead to an under or overpayment of tax at the year-end therefore you may wish to reserve funds for this if necessary.

As a result of the changes the basic income tax computation is more complex, it is therefore important to complete a tax review each year to ensure that your position is correct and up to date. For married couples, it is also worth ensuring that you are making optimal use of your combined dividend and savings allowances.


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