Proposals made in the Budget
The government has pledged to raise the personal allowance to £12,500 by the end of this Parliament. With this in mind, this Budget takes the first step towards this commitment by increasing the personal allowance of £10,600 to £11,000 from April 2016 – this is a £400 increase as opposed to the previously announced increase in the March Budget of £200.
From April 2017, the personal allowance will further increase to £11,200.
The increase in the personal allowance will also mean that from 2016/17 everyone will be entitled to the same personal allowance regardless of when they were born. In addition, it was also announced that the basic rate limit will increase to £32,000 for 2016/17 and £32,400 for 2017/18. As a result the higher rate threshold will increase to £43,000 and £43,600 respectively.
As part of the tax triple lock, legislation will be introduced to provide that the basic, higher and additional rates of income tax will not increase above 20%, 40% and 45% respectively for the duration of this Parliament.
From April 2016 the government will remove the dividend tax credit and replace it with a new tax-free dividend allowance of £5,000 a year for all taxpayers. The government will also set the dividend tax rates at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company – will pay more.
The government also announced that rent-a-room relief will increase from £4,250 to £7,500 a year from April 2016.
The government also announced that it would restrict relief for finance costs, such as mortgage interest and interest on loans to buy furnishings, on buy-to-let residential properties to the basic rate of income tax gradually from 6 April 2017.
For further details on the rent-a-room relief and restricting finance costs relief changes please see section 9 on Property Tax.
When the personal allowance reaches £12,500 it will be increased automatically ‘in line with the equivalent of 30 hours at the national minimum wage rate that individuals over 21 are entitled to’.
The fact that each individual has their own personal allowance and their own starting and basic rate tax bands means that worthwhile overall income tax saving opportunities are available for 2015/16. This is especially so in regard to income that falls between £100,000 – £121,200 which causes the removal of some or all of the personal allowance and an effective tax rate of 60% for non-dividend income.
Tax-free dividend allowance
From 6 April 2016, a tax-free dividend allowance of £5,000 a year will apply to all taxpayers. This, combined with the personal allowance and the personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers will mean individuals will be able to receive up to £17,000 (basic rate taxpayer) and £16,500 (higher rate taxpayer) tax free in a tax year.
For all couples, as a bare minimum, both personal allowances and starting/basic rate tax bands should be used to the full. This is particularly beneficial where income can be legitimately shifted from a higher or additional rate taxpaying spouse/civil partner to a non, starting or basic rate taxpaying spouse/civil partner. For those with cash and investments this will usually be facilitated by an unconditional transfer of income-producing assets from the higher tax paying spouse/civil partner to the other.
Any such transfers would usually be CGT and IHT neutral as transfers between spouses/civil partner living together are treated as transfers on a no gain/ no loss basis for CGT purposes and transfers between UK domiciled spouses/civil partner (living together or not) are exempt from IHT without limit.
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