From 6 April 2016, a new tax free personal savings allowance will be introduced for basic and higher rate taxpayers. This will be £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Savings income below these limits will be exempt from tax. There will be no savings allowance for additional rate taxpayers. The deduction of basic rate tax at source from bank interest will be abolished from this date.
For 2016/17, the personal allowance will be £11,000. It is intended that this increase to £12,500 by 2020.
The basic rate band will increase to £32,000 meaning that an individual will need income of £43,000 before falling into the higher rate of taxation.
The additional rate of 45% continues to apply where total income exceeds £150,000.
Where income exceeds £100,000, the personal allowance is tapered away by £1 for every £2 of income in excess of this amount so those with income of more than £122,000 will not benefit from the personal allowance.
Taxation of dividends
From 6 April 2016, the notional dividend tax credit of 10% will be abolished and a new dividend tax allowance of £5,000 per annum will be introduced.
The tax rates will also change for dividend income in excess of the £5,000 allowance: 7.5% for basic rate payers; 32.5% for higher rate payers; and 38.1% for additional rate payers.
This will trigger an actual tax increase for those with savings and dividend income in excess of £16,000 in 2016/17. Those who are able to do so may wish to consider whether it is worth taking increased dividends prior to 5 April 2016.
From 6 April 2016, the annual allowance of £40,000 is to be tapered for those with total income from all sources over £150,000. The allowance will be reduced by £1 for every £2 of income over £150,000 to a possible £10,000 for annual income over £210,000. Income for this purpose includes employer pension contributions.
Any unused allowance from earlier tax years can still be carried forward for up to three years.
Pension contributions in excess of the available allowance are taxed as income.
The lifetime allowance, the upper limit on the value of tax favoured pension arrangements, is to reduce to £1 milliion on 6 April 2016. It will then increase in line with inflation (as measured by CPI) from 6 April 2018. The current limit of £1.25 million can be secured by stopping all pension contributions before 6 April 2016 and registering with HM Revenue & Customs ("HMRC") for Fixed Protection 2016 ("FP16").
Individuals with pension arrangements valued at more than £1 million at 6 April 2016 will be able to register for Individual Protection 2016 ("IP16"), which provides a personal lifetime allowance equal to the April 2016 value, but capped at £1.25 million. Pension contributions may continue post 6 April 2016 without affecting the IP16 allowance.
Pension funds in excess of the available lifetime allowance are taxed at 55%.