There are a number of major changes to taxation from April of which we are already aware.
- There are major changes to the taxation of dividends.
From 6th April each individual will:
- receive a tax-free dividend allowance of £5,000 in addition to their personal allowance, and
- all dividends above £5,000 will be taxed at 7.5% above the current level, ie a basic rate taxpayer will pay tax at 7.5% instead of receiving a tax credit deemed to meet his liability.
Therefore, if one spouse receives dividend income above £5,000 then they should consider transferring some of their holdings to their spouse or civil partner in order to utilise their allowance. This will have a substantial effect on the tax paid by many people operating a business through a limited company, and may affect their decision of whether to incorporate or continue as a sole trader.
- Similarly, a basic rate taxpayer will be able to receive up to £1,000 of savings income tax free, reducing to £500 for a higher rate taxpayer. Couples should therefore ensure that income is divided between them in order to make the most tax effective use of these allowances.
- From the same date, all interest will be paid gross rather than after the deduction of basic rate tax as at present. This will eliminate the need for non taxpayers to register with their savings institution to receive interest gross.
- Landlords of furnished properties will no longer be able to deduct an automatic 10% wear & tear allowance when they compute taxable profits. Instead they will be able to deduct any costs that they actually incur in replacing items previously covered by the allowance such as moveable furniture, carpets & curtains, linen and crockery.
- If you are expecting to work abroad for most or all of the 2016/17 then overseas earnings are only exempt from UK tax if you are out of the country for a full tax year. Therefore, if your contract is expected to start shortly after 6th April 2016 and/or finish shortly before 5th April 2017 then you should take steps to ensure that you are out of the country at midnight on both 5th April 2016 and 5th April 2017 even if it means sipping a cold beer beside the swimming pool in Tenerife.
- Major changes in the tax deductibility of interest against rental income will take effect from 2017/18.
Firstly, the rate at which tax relief is available will reduce progressively over the next few years. In 2017/18 25% of interest paid will only receive tax relief at basic rate, and not at the taxpayers marginal rate as at present. In 2018/19 this proportion will increase to 50% with a further increase to 75% in 2019/20. From 2020/21 the whole of the interest will only be eligible for relief at basic rate.
Secondly, the manner in which the relief is given is changing. Currently mortgage interest is deducted from rental income in calculating taxable profit. However, in future the deduction will be given as a credit against tax owed. Is this a big change? It may be for someone earning, say, £48,000 in salary and receiving net rental income of £1,000 after deducting £2,000 interest charges. Currently, their taxable income is £49,000. In future that will rise to £51,000 as the mortgage interest does not reduce taxable income. Therefore, with all income remaining exactly the same the taxpayer has suddenly found himself above the £50,000 income level at which he needs to repay Child Tax Credit! A similar effect will be felt by someone currently just below the £100,000 level above which personal allowances are withdrawn.
- Finally, stamp duty on the purchase of second properties after 1st April 2016 increases by 3% on each band. For instance, someone buying a second property for £200,000 will currently pay stamp duty of £1,500. This will increase to £7,500 after 1st April. This is calculated as 3% on the first £125,000 (currently zero) and 5% (currently 2%) on the balance. And for cheaper properties the effect is even more pronounced. A small apartment costing £120,000 will see stamp duty increase from zero to £3,600.
Don’t forget, we are happy to advise you on any of the above if you think you may be affected.