Monday, 7 March 2016

Changes to Tax on Savings & Investments

Over the past few days I have been getting up to speed with the changes to the way savings and dividends will be taxed starting in the new tax year next month

From April 6th, there will be a new Personal Savings Allowance which introduces some big changes in the way savings are taxed. It is estimated that over 90% of savers will as a result pay no tax on their savings. Most savers will get up to £1,000 interest tax-free.

Until now 20% tax has been automatically deducted from interest on savings - basic rate tax payers would pay £20 tax on every £100 of interest on their savings. From 6th April, interest on savings will be paid gross i.e. without deduction of tax.

Basic rate tax payers will therefore save up to £200 tax on their savings. The allowance for higher rate tax payers is £500 so they also will save up to £200 tax.

Those with incomes of less than £17,000 will pay no tax on savings, even where it is above £1,000 as this will be covered by their personal allowance.

The PSA is separate to the personal allowance relating to tax on incomes. For the new tax year 2016/17 everyone can earn £11,000 before income tax is paid.

What Type of Savings are Covered?

In addition to the usual bank and building society savings, the new rules also cover peer to peer lending, savings in credit unions. as well as interest on investments such as corporate bonds and gilts. It will also cover interest distributions on investments such as OEICs and Investment Trusts - but not dividend distributions.

What About Dividends on Stocks & Shares?

From 6th April 2016 these also will change and the old Dividend Tax Credit will be replaced by a new Dividend Allowance of 0% tax on the first £5,000 of dividend income each year **.

Therefore you could have an income portfolio of £125,000 yielding 4% and not pay any tax. You could even have investments of £500,000 yielding 1% and still receive this income tax free.

Of course it would be sensible to take advantage tax breaks and hold investments in an ISA. The limit for the coming tax year remains at £15,240 rising to £20,000 from April 2017.

Investors who receive over £5,000 dividend income (outside of their ISA) will pay tax of 7.5% for basic rate tax payers but a hefty 32.5% for higher rate tax payers. This is designed to deter owners of businesses who have gained an advantage in the past by taking income in the form of dividends rather than salary.

I suspect I will not really be affected by these changes as my investments are held with my S&S ISA (and SIPP) but I guess its always as well to be aware of these changes.

(** Will fall to £2,000 from April 2018)



  1. Many years ago when the then chancellor removed the dividend tax credit to our present method , I thought one day someone is going to say 'Hey look, those that rely on their divines don't pay any tax' and sure enough here we are.
    Politically speaking I feel the time has come, induced by the mess of pensions, to scrap all these tax allowances including pensions and ISA's and just have one tax rate across board and everyone is treated the same.

    1. Good point Louis - was it Gordon Brown who made a few changes?

      I guess not too many investors will be affected by the changes to the dividend tax - most will certainly have their returns sheltered in an ISA and I cannot see the Chancellor scrapping these in a hurry.

      I think the single rate of tax on pensions has more mileage but I believe it could be difficult to implement.

      Be interested to see what comes out of the Budget next week.