The personal allowance for 2015/16
For those born after 5 April 1938 the personal allowance will be increased to £10,600. For those born before 6 April 1938 the personal allowance remains at £10,660.
The reduction in the personal allowance for those with ‘adjusted net income’ over £100,000 will continue. The reduction is £1 for every £2 of income above £100,000. So for 2015/16 there is no personal allowance where adjusted net income exceeds £121,200.
Tax bands and rates for 2015/16
The basic rate of tax is currently 20%. The band of income taxable at this rate is being decreased from £31,865 to £31,785 so that the threshold at which the 40% band applies will rise from £41,865 to £42,385 for those who are entitled to the full basic personal allowance.
The additional rate of tax of 45% is payable on taxable income above £150,000.
Dividend income is taxed at 10% where it falls within the basic rate band and 32.5% where liable at the higher rate of tax. Where income exceeds £150,000, dividends are taxed at 37.5%.
Starting rate of tax for savings income
From 6 April 2015, the maximum amount of an eligible individual’s savings income that can qualify for the starting rate of tax for savings will be increased from £2,880 to £5,000, and this starting rate will be reduced from 10% to 0%. These rates are not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.
This will increase the number of savers who are not required to pay tax on savings income, such as bank or building society interest. Eligible savers can register to receive their interest gross using a form R85.
The increase will also provide a useful tax break for director-shareholders who extract their share of profits from a company by taking a low salary and the balance in dividends. This is because dividends are taxed after savings income and thus are not included in the individual’s ‘taxable non-savings income’.
Transferable Tax Allowance
From 6 April 2015 married couples and civil partners may be eligible for a new Transferable Tax Allowance.
The Transferable Tax Allowance will enable spouses and civil partners to transfer a fixed amount of their personal allowance to their spouse. The option to transfer is not available to unmarried couples.
The option to transfer will be available to couples where neither pays tax at the higher or additional rate. If eligible, one partner will be able to transfer 10% of their personal allowance to the other partner which means £1,060 for the 2015/16 tax year.
For those couples where one person does not use all of their personal allowance the benefit will be up to £212 (20% of £1,060).
Eligible couples can now register their interest for marriage allowance at GOV.UK/marriageallowance. The spouse or partner with the lower income registers their interest in transferring some of their personal allowance by entering some basic details. HMRC will subsequently invite the couple to apply. Those who don’t register their interest will be able to make an application at a later date and still receive the allowance.
The personal allowance and tax bands for 2016/17 and beyond
The personal allowance will be increased to £10,800 in 2016/17 and to £11,000 in 2017/18. The Transferable Tax Allowance will also rise in line with the personal allowance, being 10% of the personal allowance for the year.
The higher rate threshold will rise in line with the personal allowance, taking it to £42,700 in 2016/17 and £43,300 in 2017/18 for those entitled to the full personal allowance.
Personal Savings Allowance
The Chancellor announced that legislation will be introduced in a future Finance Bill to apply a Personal Savings Allowance to income such as bank and building society interest from 6 April 2016.
The Personal Savings Allowance will apply for up to £1,000 of a basic rate taxpayer’s savings income, and up to £500 of a higher rate taxpayer’s savings income each year. The Personal Savings Allowance will not be available for additional rate taxpayers.
These changes will have effect from 6 April 2016 and the Personal Savings Allowance will be in addition to the tax advantages currently available to savers from Individual Savings Accounts.
The Personal Savings Allowance will provide basic and higher rate tax payers with a tax saving of up to £200 each year.
The end of tax deduction at source on interest
Due to the changes to the starting rate for savings and the introduction of a Personal Savings Allowance, many individuals will no longer need to pay tax on their savings income. Currently, 20% income tax is automatically deducted from most interest on savings excluding ISAs.
From April 2016, the automatic deduction of 20% income tax by banks and building societies on non-ISA savings will cease.
Individual Savings Accounts (ISAs)
On 1 July 2014 ISAs were reformed and the overall annual subscription limit for these accounts was increased to £15,000 for 2014/15. From 6 April 2015 the overall ISA savings limit will be increased to £15,240.
The Chancellor announced in the Autumn Statement an additional ISA allowance for spouses or civil partners when an ISA saver dies. The additional ISA allowance will be equal to the value of a deceased person’s savings at the time of their death and will be in addition to the normal ISA subscription limit. Regulations will set out the time period within which the additional allowance will be used. In certain circumstances an individual will be able to transfer to their own ISA non-cash assets such as stocks and shares previously held by their spouse.
In most cases it is envisaged that the additional allowance will be used to subscribe to an ISA offered by the same financial institution that provided the deceased person’s ISA. As the new regulations will allow the transfer of stocks and shares directly into the new ISA, in many cases the effect will be that the investments are left intact and the spouse becomes the new owner of the deceased person’s ISA.
This measure applies for deaths from 3 December 2014 and takes effect from 6 April 2015.
As announced at Budget 2015, regulations will be introduced to extend the list of qualifying investments for ISAs and Child Trust Funds to include listed bonds issued by Co-operative Societies and Community Benefit Societies and SME securities that are admitted to trading on a recognised stock exchange, with effect from 1 July 2015.
The government will also consult during summer 2015 on further extending this list of qualifying investments to include debt securities and equity securities offered via crowd funding platforms.
It was announced at Budget 2015 that regulations will be introduced in autumn 2015, following consultation on technical detail, to enable ISA savers to withdraw and replace money from their cash ISA without it counting towards their annual ISA subscription limit for that year.
At Budget 2014, the Chancellor announced that peer-to-peer loans would be eligible for inclusion within ISAs. The government has consulted on the options for changes to the ISA rules to allow peer-to-peer loans to be held within them.
No start date has been announced.
Peer-to-peer lending is a small but rapidly growing alternative source of finance for individuals and businesses. The inclusion of such loans in ISAs will increase choice for investors and encourage the growth of the peer-to-peer sector.
Help to Buy ISA
The government has announced the introduction of a new type of ISA, the Help to Buy ISA, which will provide a tax free savings account for first time buyers wishing to save for a home.
The scheme will provide a government bonus to each person who has saved into a Help to Buy ISA at the point they use their savings to purchase their first home. For every £200 a first time buyer saves, the government will provide a £50 bonus up to a maximum bonus of £3,000 on £12,000 of savings.
Help to Buy ISAs will be subject to eligibility rules and limits:
An individual will only be eligible for one account throughout the lifetime of the scheme and it is only available to first time buyers.
Interest received on the account will be tax free.
Savings will be limited to a monthly maximum of £200 with an opportunity to deposit an additional £1,000 when the account is first opened.
The government will provide a 25% bonus on the total amount saved including interest, capped at a maximum of £3,000 which is tax free.
The bonus will be paid when the first home is purchased.
The bonus can only be put towards a first home located in the UK with a purchase value of £450,000 or less in London and £250,000 or less in the rest of the UK.
The government bonus can be claimed at any time, subject to a minimum bonus amount of £400.
The accounts are limited to one per person rather than one per home so those buying together can both receive a bonus.
As is currently the case it will only be possible for an individual to subscribe to one cash ISA per year. It will not be possible for an account holder to subscribe to a Help to Buy ISA with one provider and another cash ISA with a different provider.
Once an account is opened there is no limit on how long an individual can save into it and no time limit on when they can use their bonus.
The government intends the Help to Buy ISA scheme to be available from autumn 2015 and investors will be able to open a Help to Buy ISA for a period of four years.
Junior ISA and Child Trust Fund (CTF)
The annual subscription limit for Junior ISA and Child Trust Fund accounts will increase from £4,000 to £4,080.
The government has previously decided that a transfer of savings from a CTF to a Junior ISA should be permitted at the request of the registered contact for the CTF. The government has confirmed the measure will have effect from 6 April 2015.
Bad debt relief on investments made on peer-to-peer lending
The government will introduce a new relief to allow individuals lending through peer-to-peer platforms to offset any losses from loans which go bad against other peer-to-peer income. It will be effective from 6 April 2016 and, through self assessment, will allow individuals to make a claim for relief on losses incurred from 6 April 2015.
There is an overall limit, known as the lifetime allowance, on the total amount of tax relieved pension savings that an individual can have over their lifetime. The Chancellor has now announced that for tax year 2016/17 onwards:
The standard lifetime allowance will be reduced from £1.25 million to £1 million.
Fixed and individual protection regimes will be introduced alongside the reduction in the lifetime allowance to protect savers who think they may be affected by this change.
The lifetime allowance will be indexed annually in line with CPI from 6 April 2018.
Pensions – changes to access to pension funds
The Taxation of Pensions Act has recently been enacted. It provides that individuals aged 55 or over can access their money purchase pension savings as they choose from 6 April 2015.
In most cases access to the fund will be achieved in one of two ways:
Allocation of a pension fund (or part of a pension fund) to a ‘flexi-access drawdown account’ from which any amount can be taken over whatever period the person decides.
Taking a single or series of lump sums from a pension fund (known as an ‘uncrystallised funds pension lump sum’).
When an allocation of funds to a flexi-access account is made the member typically will take the opportunity of taking a tax free lump sum from the fund (as under current rules).
The person will then decide how much or how little to take from the flexi-access account. Any amounts that are taken will count as taxable income in the year of receipt.
Access to some or all of a pension fund without first allocating to a flexi-access account can be achieved by taking an uncrystallised funds pension lump sum.
The tax effect will be:
- 25% is tax free
- the remainder is taxable as income.
- An annuity can, of course, be purchased with some or all of the fund as currently.
The fundamental tax planning point arising from the changes is self-evident. A person should decide when to access funds depending upon their other income in each tax year.
Pension freedoms to be extended to people with annuities
The Chancellor announced just before the Budget a new flexibility for people who have already purchased an annuity. From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity for a capital sum.
Individuals will then have the freedom to take that capital as a lump sum, or place it into drawdown to use the proceeds more gradually.
Income tax at the individuals’ marginal rate will be payable in the year of access to the proceeds.
The proposal will not give the annuity holder the right to sell their annuity back to their original provider. The government has begun a consultation on the measures that are needed to establish a market to buy and sell annuities and who should be permitted to purchase the annuity income.
The government recognises that for most people retaining their annuity will be the right choice. However, individuals may want to sell an annuity, for instance to pay off debts or to purchase a more flexible pension income product.
Taxation of resident non-domiciles
There will be some changes in the annual charge paid by non-domiciled individuals resident in the UK who wish to retain access to the remittance basis of taxation.
The charge paid by people who have been UK resident for seven out of the last nine years will remain at £30,000. The charge paid by people who have been UK resident for 12 out of the last 14 years will increase from £50,000 to £60,000. A new charge of £90,000 will be introduced for people who have been UK resident for 17 of the last 20 years.
The changes apply for 2015/16.
The government is consulting on making the election to pay the remittance basis charge apply for a minimum of three years.