Yesterday the wheels of the tax legislation process turned once again with HMRC publishing a slew of updates, policy papers and consultations that could have a great impact on your finances.
In this article, our Practice Manager, Alan McCappin ACCA, takes a closer look at the 5 most important changes that were outlined in Finance Bill 2016, and what they could mean for small businesses and individuals.
The rates of the new dividend tax were first announced in the Summer Budget, but we were not sure how it will work. It was only on 17th August 2015 that the government published a factsheet explaining the new tax-free dividend allowance.
As things stand now, the 10% tax credit on dividend income has been abolished. In its place £5,000 dividend tax allowance has been introduced. This allowance is available to all UK residents who have a dividend income. They will pay tax on any dividends received over the £5000 allowance at a rate determined by their personal tax band.
For more details refer to the government policy paper: Income Tax: changes to dividend taxation
Personal savings allowance (PSA)
Right now individuals with non-savings income below £15,600 have access to a zero-rate tax band for savings income of up to £5000. Savings income could be interest on bank or building society accounts. What this means is people with low incomes or pensions do not have to pay tax on interest they receive as long as they fall within the band. However, as bank interest has tax deducted at 20%, the low earners either need to reclaim the tax deducted by the bank or register for interest to be paid gross.
Starting April 2016, all bank and building society interest will be paid gross. To avoid numerous small bills, basic rate taxpayers will have a personal savings allowance (PSA) to cover an income of £1,000 and higher-rate taxpayers will have a savings allowance of £500, without any tax due. Higher-rate taxpayers (45%) won’t get a savings allowance.
Alongside the launch of the PSA, banks, building societies and NS&I will cease to deduct tax from account interest they pay to customers.
Read more details here: Income Tax: Personal Savings Allowance
Wear and tear allowance
This will be of interest to people with buy-to-let properties. From April 2016, the wear and tear allowance for furnished let property will be replaced with a renewals basis for all let residential properties. What this means is landlords of residential dwelling houses will be able to deduct the costs they incur on replacing furnishings, appliances and kitchenware in the property. The aim of the proposal is to give relief on capital expenditure to a wider range of property businesses as well as a fairer way of calculating taxable profits. The relief will not be available to ‘furnished holiday letting’ businesses and letting of commercial properties, as they receive relief through the Capital Allowances regime.
Read the government consultation paper here: Replacing Wear and Tear Allowance with Tax Relief for Replacing Furnishings in Let Residential Dwelling Houses
Company distributions of corporate, income and capital gains tax
The government is tightening the noose around the way capital is distributed when a company shuts down. As a means to taking the most tax-efficient way to close a company, Members Voluntary Liquidations distributes company funds as capital rather than salary. This makes the company subject to capital gains tax instead of income tax. As per new rules, shareholders will not be able to convert to capital what might otherwise have been paid as an income distribution (mostly a dividend).
Read more about it here: Corporation Tax, Income Tax and Capital Gains Tax: company distributions
Tax on benefits
Currently, HMRC can use its discretion to decide what kind of benefits-in-kind should be taxed, or which are deemed trivial and this exempt from tax laws. Starting April 2016, benefits worth £50 or less, paid for by the employer, won’t trigger a tax and national insurance bill for the staff. We think this is a big step towards simpler taxes as it would cut administrative costs for both HMRC and the employer. Directors and senior people of so-called ‘close companies’ are also bound to benefit from the new rules.
If you're still not sure how changes announced in the Finance Bill 2016 affect your finances, please ask your accountant.