We are now in the 2016/17 tax year and hence new tax rates and rules have come into force. From 6 April 2016 our individual personal allowance (amount each person can earn tax free) has increased to £11,000. However, the additional personal allowance that was previously available to people born before 6 April 1938 has now ceased and £11,000 is the personal allowance for everybody, regardless of age.
Although the income tax changes are relatively small, there are more significant changes to capital gains tax. The annual exemption for individuals remains at £11,100 but the standard rate of CGT has been reduced from 18% to 10% and the higher rate of 28% has been reduced to 20%. This could result in a generous tax saving if you have large gains.
The new National Living Wage has also commenced. 25’s and over are now entitled to a wage of £7.20 per hour. Minimum wage regulations continue to apply for those aged under 25.
The Employer Allowance has increased from £2,000 to £3,000. This can be set against an employers class 1B liability. The increase in the allowance does come with a restriction though as companies that have director only employees are no longer entitled to the allowance.
Perhaps one of the biggest changes for our clients is the change to the way dividends are taxed. Previously, dividends came with a deemed tax credit and as long as they fell within your basic rate tax band they were effectively tax free, as they were covered by the tax credit. Under the new regime, the tax credit has been abolished. Now, the first £5,000 of dividends within your basic rate band are effectively tax free as they are taxed at 0%. Any remaining dividends within the basic rate band are taxed at 7.5%. Dividends falling within your higher rate band will now be taxed at 32.5% and any that fall into the additional rate are taxable at 38.1%.
This is perhaps best demonstrated with an example of how director/shareholders commonly take their remuneration (examples do not include NI as not material)
Last year, 2015/16:
Dividends 31,111 (this is £28k of dividends actually drawn plus the tax credit)
Personal allowance (10,600)
30,400 x 10% = 3,040
Tax credit 3,111
Surplus tax credit 71 not repayable
Hence, no personal tax liability
This year, 2016/17, same income, new tax rules:
Personal allowance (11,000)
5,000 x10% = 0
23,000 x 7.5% 1725 of tax payable
So with the same dividend income there is additional tax of £1725 !
Do get in touch if you need any help.