Our Good With Money expert John Ditchfield, partner at Castlefield, has very kindly allowed us to carry his brilliant guide to the forthcoming changes to the personal tax regime. Thank you, John!
The tax reliefs available on pensions are certainly under threat for higher earners, as Castlefield covered in a blog on their site, but what the Treasury takes away with one hand they do give back with another (well sort of..) – from 6 April this is in the form of some new allowances for income.
The new rules for taxing dividends and allowing payment of ordinary bank deposit interest tax-free will change what assets savers and investors hold in different investment products (wrappers).
From 6 April, the new tax rules for bank deposits will see banks pay interest gross, rather than after a deduction of 20 per cent income tax.
Under a new personal savings allowance, the first £1,000 of interest will be tax-free for basic rate taxpayers and the first £500 for higher rate taxpayers. Additional rate taxpayers will receive no allowance, a vanishingly small percentage of the electorate are in this group. Also, rather helpfully, non-taxpayers will no longer need to fill out the R85 form to receive interest without tax deducted.
Even at an interest rate of 1.5 per cent, basic rate taxpayers will be able to shelter nearly £70,000 in an ordinary bank deposit account and higher rate taxpayers will be able to shelter £30,000. In effect this creates something like the ISA allowance in that money can be held tax-free in cash.
This means that ISA allowances can be left free for other assets. Another change, allowing ISAs to be refilled in the same tax year, also takes effect from April. This will allow investors to move cash currently within their ISAs into normal bank deposit accounts in order to benefit from the new personal savings allowance.
They can then restock their ISA within the same tax year with other assets, such as non-ISA OEICs and Unit Trusts, up to the amount they had in their ISA before taking cash out, without using up their annual ISA allowance of £15,240.
The new dividend rules offer some very useful planning opportunities for individuals with assets in shares, OEICs or Unit Trusts. The first £5,000 of dividend income is received tax-free for both basic rate and higher rate income taxpayers. At the end of 2015, the dividend yield on the FTSE All Share was [1]3.83%. Therefore an individual could hold a very significant sum in an income fund and this would be tax free, so for example the Con Brio BEST Income Fund which currently yields in excess of 4% would offer good tax free income on over £100,000 of investment.
This rule change could see investors move equity income assets outside of pension and ISA wrappers to use this new £5,000 allowance. By targeting equity income stocks and collectives, capital growth is potentially covered by the exempt amount for capital gains. If so, this creates another ISA-like home for a substantial amount of income yielding investments.
That leaves ISAs free to hold growth-oriented assets and to receive interest and dividend income that cannot be covered by the new personal savings and dividend allowances. Using these allowances to their fullest alongside ISAs and pensions should mean the vast majority of UK savers and investors pay no tax on their savings and investments, except for taxable withdrawals from pensions (which should be more than compensated by tax relief and tax-free cash).
In addition to the ongoing needs created by the new flexible pension rules, these changes once again allow advisers to demonstrate their worth to clients in terms of hard cash saved by aligning savings and investments with the most appropriate wrapper or allowance.
John Ditchfield
Partner, Castlefield Advisory Partners
[1] FTSE Group Fact Sheet 29/12/2015
