The new tax year
Today marks the start of the new tax year, that will bring changes which could affect many contractors’ take home pay. In this blog we outline the top 10 changes, to ensure you’re fully prepared.
1. Dividend allowance
The first £5,000 you take in dividends annually will be tax free (this is on top of the income tax personal allowance), then anything over that will be taxed at the following rates:
Basic rate: 7.5%
Higher rate: 32.5%
Additional rate: 38.1%
Our new dividend calculator will give you a clear indication as to how much more tax you’ll pay for 2016/17.
Tax will not be deducted at source and taxpayers will have to use their Self Assessment Tax Return (SATR) to pay any tax owed. So basic rate taxpayers receiving £5,000 or more must complete a SATR.
2. Capital Gains Tax (CGT) will reduce
If you sell an asset that has gone up in value, then CGT is the tax you will have to pay on that asset. Depending on the rate of income tax you pay, CGT will either be payable at the basic or higher rate. If you’re selling residential property, CGT only applies to any additional properties you may have (other than your main home).
From today the rates for CGT are:
Basic rate: cut from 18% to 10%
Higher rate: cut from 28% to 20%
3. Flexible ISA
From today should you wish to withdraw and replace your ISA funds within the same tax year, you will not lose the full ISA tax benefits.
If you have money in stocks and shares ISAs you should also be able to do the same, if you withdraw and replace via a cash trading account.
4. Personal Saving Allowance
Anyone aged 18 + will be able to earn up to £1,000 a year on their personal savings – tax free.
Take a look at the tax rate bands to see how you can benefit:
- Basic-rate (20%) taxpayers – can earn £1,000 of savings tax free (saving a maximum of £200 compared with 2015/16 tax year).
- Higher-rate (40%) taxpayers – can get a personal savings allowance of £500 (saving a maximum of £200 compared with 2015/16 tax year).
- Additional-rate (45%) taxpayers earning above £150,000: £0 – unfortunately do not get an allowance.
See the Treasury’s factsheet for more information. The Personal Savings Allowance is being dubbed as the ‘biggest savings shake-up for a generation’, so don’t miss out!
5. Income Tax and Personal Allowance thresholds increase
Taxable income rate: from today will rise from £10,600 to £11,000
Higher rate income tax: the 40p threshold will rise from £42,385 to £43,000
6.New State Pension is introduced; current state pension rises
You will receive the new State Pension if you retire today and are:
Female: born on or after 6 April 1953
Male: born on or after 6 April 1951
The flat rate State Pension is £155.65 per week but the amount you’ll receive will depend on your National Insurance (NI) contributions:
35 years of NI contributions: you qualify for the full allowance
At least 10 years of NI contributions: to qualify for part of the weekly allowance
Less than 10 years of NI contributions: you will not receive any of the State Pension
If you retired earlier, you’ll receive the old state pension, which will increase to £119.30.
7. Innovative Finance ISA (IFISA) will launch
If you use peer-to-peer (P2P) platforms to save then the new IFISA will allow you to get tax free returns. Whilst one of the attractive qualities is the higher rates of interest, it’s worth being aware that P2P isn’t protected by the Financial Services Compensation Scheme (FSCS).
8. Lifetime Allowance cut
Today will see a reduction in the amount you can save into your pension without a tax charge – AKA your Lifetime Allowance – from £1.25m to £1m. Your pension benefits are tested against the lifetime allowance as soon as you start to draw your benefits.
Despite the government’s claims that the reduction will only impact 4% of the wealthiest population, it will also hit those people working hard to save for retirement. You can protect your pot if it exceeds the Lifetime Allowance.
Remember! Be careful with Auto-Enrolment, as any contributions you make could wipe out any protection you may have. We advise that you discuss this with an Independent Financial Adviser, to ensure you have the right advice and support for you and your circumstances.
9. Annual Allowance Taper will be introduced
For higher earners, the annual pension allowance will gradually be reduced. At present it’s set at £40,000, but the government is set to introduce a taper system that will reduce the limit for those whose income exceeds £150,000. The reduction rate will be set at £1 for every £2 of income, meaning that if you’re earning £210,000 or more, your annual allowance will be reduced to £10,000.
10.National Living Wage and Stamp Duty Land Tax increases
Both have already been enforced, as from 1 April:
National Living Wage (NLW): anyone aged 25 or over will receive £7.20p/h, an increase from the previous NLW of £6.50p/h.
Stamp Duty Surcharge: an additional 3% has been added onto the current stamp duty rates for anyone who purchases a second home or a buy-to-let property. Whether you’ll have to pay or not will depend on your individual circumstances. But it is likely to hit tenants who are charged more rent to cover the additional cost to their landlord’s.
So there you have it, 10 changes for the new tax year that every contractor should be aware of. If you’re wondering what these changes will mean for you, we’ve created our top 10 new tax year resolutions to aid contractors in staying financially fit this new tax year. Download them today for the ultimate in contracting success.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.