Changes to Dividend Taxation
A new Dividend Allowance is to be introduced for 2016/17 onwards. The current system of taxing dividends, complete with dividend tax credits, is abolished. The Dividend Allowance will be £5,000, and dividends in excess of the allowance will be taxed at the following rates:
7.5% (dividend ordinary rate) on dividends within the basic rate band;
32.5% (dividend upper rate) on dividends within the higher rate band;
38.1% (dividend additional rate) on dividends above the higher rate limit.
Dividend income is generally treated as the highest part of an individualís income for the sake of determining into which rate band it falls. For 2015/16, the dividend ordinary, upper and additional rates are, respectively, 10%, 32.5% and 37.5%. However, a comparison between these and the 2016/17 rates is misleading due to the effect of dividend tax credits in 2015/16. Taking the tax credits into account, the effective rates for 2015/16 are, respectively, 0%, 25% and 30.55%.
The Dividend Allowance is not a deduction in arriving at total income or taxable income. Instead, the first £5,000 of dividend income will attract a zero rate of income tax.
There is no distinction between dividends from UK companies and those from overseas companies; all dividends (and other company distributions treated as dividends) will potentially attract the Dividend Allowance. Dividends within an ISA continue to be tax-free, and do not count towards the Allowance.
The following apply as regards trusts and estates:
the Dividend Allowance is available only to UK resident individuals and not to trustees or personal representatives;
the abolition of dividend tax credits applies across the board regardless of the status of the recipient;
dividend income received by beneficiaries of deceased estates will continue to be grossed up at (and will have borne tax in the estate at) the dividend ordinary rate, which will now, however, be 7.5% as above; and
the dividend trust rate will continue to apply to dividends received by trusts with accumulated or discretionary income; this rate will increase to 38.1% from 6 April 2016 so as to continue to mirror the dividend additional rate for individuals.
Personal Savings Allowance
A new Personal Savings Allowance (PSA) is to be introduced for individuals for 2016/17 onwards. This will operate in conjunction with the current 0% starting rate for savings and the £5,000 starting rate limit, both of which will continue unchanged. Also for 2016/17 onwards, banks, building societies and National Savings and Investments will no longer be required to deduct basic rate income tax at source from interest they pay to their customers. Savings income within an ISA will continue to be tax-free, and does not need to be covered by the PSA.
The PSA will be £1,000 for basic rate taxpayers, i.e. those who have no income chargeable at the higher or additional rates or the dividend upper and additional rates. For taxpayers with income chargeable at the higher but not the additional rate (or at the dividend upper but not the dividend additional rate), the PSA will be £500. Taxpayers with income chargeable at the additional rate or dividend additional rate will not be entitled to a PSA.
The PSA is not a deduction in arriving at total income or taxable income. Instead, the savings income covered by the PSA (whether the available PSA be £500 or £1,000) will attract a zero rate of income tax.
Deduction of Tax at Source
Legislation will be introduced with effect from 6 April 2017 to remove the requirement to deduct income tax at source from interest distributions from open-ended investment companies, authorised unit trusts and investment trust companies and from interest on peer-to-peer loans. This will bring the treatment of these types of savings income into line with that of interest paid on bank and building society accounts following the introduction of the Personal Savings Allowance a year earlier.
General ISA Allowance from April 2017
The ISA allowance will rise from £15,240 to £20,000 in April 2017.
From 6 April 2017 any adult under 40 will be able to open a new Lifetime ISA and contribute up to £4,000 each year and will receive a 25% bonus from the government at the end of the year. Savers will be able to contribute to one Lifetime ISA in each tax year, as well as a cash ISA, a stocks and shares ISA, and an Innovative Finance ISA, within the new overall ISA limit of £20,000. A Lifetime ISA can be funded by transfers from other ISAs in accordance with normal rules.
Contributions can continue to be made with the bonus paid up to the age of 50. Funds, including the Government bonus, can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 for use in retirement.
The limit for property purchased using Lifetime ISA funds will be set at £450,000 and will apply nationally. Savers can continue to open a Help to Buy ISA until November 2019 and can also choose to open a Lifetime ISA, but will only be able to use the Government bonus from one of their accounts to buy their first home. During the 2017/18 tax year, those who already have a Help to Buy ISA will be able to transfer the savings they have built up into the Lifetime ISA and still save an additional £4,000.
ISAs Following Death of Account Holder
The tax advantages of an ISA cease on the death of the ISA account holder. Finance Bill 2016 will enable the Treasury, via regulations, to provide for ISAs to retain their tax-advantaged status in the hands of the personal representatives following the death of the account holder.
The measures will come into effect at some point following Royal Assent to Finance Act 2016 after further consultation.
Venture Capital Schemes: Energy Generation
The Government are to exclude all remaining energy generation activities from the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and Venture Capital Trusts with effect from 6 April 2016, as well as from Social Investment Tax Relief when this scheme is enlarged in due course.
Bad Debt Relief for Peer-to-Peer (P2P) Loans
Legislation is to be introduced to allow income tax relief, broadly from 6 April 2015, for losses on the irrecoverable principal of peer-to-peer (P2P) loans. Persons subject to corporation tax will not be eligible for this relief, but may be able to claim a deduction for any losses under the loan relationships regime.