Draft Finance Bill - Deloitte comments on details of how Personal Savings Allowance and Dividend Tax Allowance will work
11 December 2015
The publication of this week’s draft Finance Bill clauses gives some detail of how the Personal Savings Allowance, first proposed in the 2015 Budget, will operate from its introduction for the 2016/17 tax year. Draft clauses for the £5,000 Dividend tax Allowance, which also commences from 2016/17, have also been published, confirming the method of operation previously announced.
Personal Savings Allowance
The Personal Savings Allowance is £1,000 for basic rate and £500 for higher rate taxpayers. Additional rate taxpayers are not entitled to the allowance.
Patricia Mock, tax director at Deloitte, said:
“The mechanics of giving the allowance are complicated and the practical consequences go beyond a straightforward deduction of the relevant amount. The level of the allowance given is based on whether the individual would hypothetically pay tax at higher or additional rate, ignoring the personal savings allowance and dividend allowance.
“Having decided on the relevant allowance, the relief is given by taxing the interest within the allowance at 0%. However, income falling within the allowance uses up part of the band that it is in and may have an effect on the rate of tax suffered on the remainder – for example an individual who receives employment income of £42,500 and interest of £1,000 would be entitled to a £500 allowance because part of their income falls above the £43,000 higher rate threshold for 2016/17; £500 remains taxable, but this will be taxed at higher rate rather than basic rate because the first £500 falling within the allowance has used up the remaining basic rate band.”
Dividend Tax Allowance
The same approach is used for the Dividend Tax Allowance. The allowance will be £5,000 for all taxpayers, but amounts falling within the dividend allowance will use any part of the lower rate bands that they would otherwise have fallen into. Hence an individual whose other income is £5,000 below the higher rate threshold and who receives £6,000 of dividends will pay the higher dividend tax rate (32.5%) on the £1,000 of taxable dividends rather than the basic dividend tax rate (7.5%).
Patricia Mock comments:
“People will need to be aware that both interest and dividend income, whether or not they fall within the relevant allowance, count towards total income for the purpose of the £50,000 limit from which the high income child benefit charge applies, and the £100,000 limit for tapering of the personal allowance.
“Whilst the introduction of these two allowances will be welcome for many savers, they come at the cost of yet more complexity to the tax system. The overall saving may not be quite as expected for many taxpayers, particularly for those whose income is at the margin of higher or additional rates or who are affected by the tapers above. Furthermore, those with overall income of less than £16,000 and savings income of less than £5,000 can already benefit from the 0% rate which applies to the first £5,000 of savings income, so they will see no benefit at all from these changes.”
Notes to editors
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.
Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.
The information contained in this press release is correct at the time of going to press.
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