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Happy New tax to you all
So how do the changes affect you?

We could start by discussing the 2016 Spring Budget; however, it seems to have become a bit of a waste of time. Gorgeous George is starting to lose his shine, many of his budget announcements have habit of being retracted before we even get a chance to consider the implications and the rest will not come into force until sometime in the future.

It is probably more efficient to discuss the changes that have come into force this tax year than focusing on what might happen in the future. Some the changes that come into force this April can have a considerable impact depending on individual circumstances.

New State Pension Rules

These only apply to people that reach state pension age after April 5th 2016. Those that have deferred their state pension will still be using the old system.  Whilst I mention deferment, the rate of deferment accrual is also being cut from 10.4% pa to 5.8% p.a. which means that you will now have to draw your State pension for close to 20 years before receiving a benefit. If you are planning to work beyond your State Pension age it may be better to save the money in an ISA.

Unless you have been credited with at least 10 years’ worth of National Insurance credits you will not receive any State Pension. You will receive national insurance credit when you earn above £112.00 per week over a twelve month period.

  There are also credits for Carers, foster parents and variety of other personal situations. If you are not sure if you will receive State Pension credits visit www.gov.uk/national-insurance-credits/eligibility.

It is important to regularly check your national insurance record. Only this week I came across a woman who had brought up two children and did not realise that she should have a State Pension. This is not uncommon, with women entitled a full state pension rather than one based on their husband’s NI record. This can be a big part of many people’s retirement planning and therefore it is important to check it.

The focus for the new State Pension has been this new fixed amount of £155.40 per week. If like me you have worked for companies had a contracted out final salary or were advised to contract out, you will not receive all of the new amount. There are a number of factors that influence the level of State Pension you will receive which make things more complex than before increasing the risk that you may be receiving the wrong amount.

Personal Savings Allowance
This new allowance for tax paid on earned interest is useful and is more a tax deduction than an allowance. ISAs focused on avoiding tax on the amount invested. This year’s allowance remains at £15,240.00.
You can see from the table below that a basic rate taxpayer with a £100,000.00 on deposit at 1% interest would not pay tax using the new Personal Savings Allowance.  Could this be the start of change in tactics?  We see ISAs in excess of a million pounds with no limits on the tax benefits. We will see what happens in future budgets.

 

 
Tax Status Tax Rate Interest before tax applied Tax Saving
Basic rate tax payer 20% £1,000.00 £200.00
Higher rate tax payer 40% £500.00 £200.00
Additional rate tax payer 45% 0 0
 

Dividend allowance

The way dividends will be taxed this year also changes. The notional 10% tax credit will be abolished and the first £5,000.00 in dividends will be tax-free.

Oddly enough, I have managed to utter the words ‘this will be in your favour’ already. If you currently don’t have any dividend income and you don’t want to pay tax, now might be the time to invest into equity backed assets. The FTSE 100 index of leading UK companies had a dividend yield of 4.58% at the time of writing.

 
 
Tax Status Dividend Tax Rate Dividend Tax Allowance
Basic rate tax payer 7.5% £5,000.00
Higher rate tax payer 32.5% £5,000.00
Additional rate tax payer 38.1% £5,000.00
 
 

Naturally there will be losers as well, owners of small limited companies who will see their dividend income taxed once they take more than £5,000.00 in dividends from their businesses. If they take dividend income up to the higher rate tax threshold, they could be faced with up to £2,400.00 personal income tax liability.

If any of these issues are of concern I would recommend that, you contact a suitability qualified financial and or Tax adviser.

 
 
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