Personal allowances and tax bands for 2015-16 remain at the level previously announced.
The personal allowance remains at £10,600 for anyone born on or after 6 April 1938. For those born before that date the allowance remains at £10,660. These allowances are withdrawn at the rate of £1 for every £2 by which “adjusted net income” is above £100,000.
The Basic Rate Tax Band is £31,785 meaning that, for people with the full personal allowance, income above £10,600 and up to £42,385 is taxed at 20% with the excess taxed at 40%. If taxable income exceeds £150,000 then the rate increases further to 45%.
Allowances and Bands for 2016-17 will increase more than previously announced.
The personal allowance for 2016-17 will now be £11,000 with a further increase to £11,200 in 2017-18. The basic rate tax band will increase to £32,000 in 2016-17 and to £32,400 in 2017-18. This means that income in 2016-17 up to £43,000 will be taxed at basic rate.
The biggest change announced is to the taxation of dividend income in 2016-17 onwards.
There is a change to the taxation of dividends that will have a major impact on individuals trading through a limited company.
Currently, dividends carry a tax credit of 10%, and this is deemed to meet the basic rate tax liability for the recipient. If the recipient is subject to higher rates of tax then dividend income is taxed at 32.5%, or £37.5% where income exceeds £150,000.
From 2016-17 the tax credit is removed. Instead, everyone will have a tax free Dividend Allowance of £5,000. Basic rate taxpayers will pay a dividend tax of 7.5% on all dividends above £5,000 with higher rate taxpayers being taxed at 32.5%, and 38.1% if income exceeds £150,000.
There are changes to childcare
The free childcare entitlement for 3 – 4 year olds will double in September 2017 from 15 hours per week to 30 hours. The launch date for the Tax-Free Childcare Scheme has been put back from this autumn to early 2017. This will provide relief for 20%, subject to a maximum relief of £2,000 or £4,000 in the case of a disabled child, of the cost of childcare.
There are changes to the taxation of rental income
The tax relief on mortgage interest in respect of rented properties will be restricted to basic rate tax relief from 2020-21. This restriction will be phased in starting in 2017-18 when 25% of the interest will receive basic rate relief only with the remaining 75% receiving full relief.
From April 2016 the 10% “Wear & Tear” allowance will be replaced by a relief enabling the actual cost of replacement furniture to be claimed as an expense. At the same time, the “Rent-a-Room” relief will increase from £4,250 to £7,500 per annum.
There are changes to pension tax relief
From April 2016 the annual limit on tax relieved pension contributions will be reduced from the current limit of £40,000 for people with “Adjusted Annual Incomes” over £150,000. The limit will reduce by £1 for every £2 by which income is above £150,000. There will be a minimum level of relief of £10,000 per annum.