Financial New Year Resolutions.
New Year new start, including for many being more financially savvy regarding personal finances, a time to review a number of tax changes announced in the three Budgets of 2015 which are due to take effect on 6th April 2016, some of which will improve your financial position and others not so.
These changes have been announced over a series of Budgets and in speaking with clients it has become clear that some missed the announcements and others have been confused as to whether measures announced in an earlier Budget were still valid. We have therefore summarised some of the key changes below.
New Tax Allowances
From 6th April 2016, a new savings tax allowance is to be introduced. As a basic rate tax payer you will be able to earn £1,000 in interest income tax free or £500 if you are a higher rate tax payer (total income below £150,000). The new allowance does not apply to additional rate tax payers.
The change means that banks and building societies will no longer deduct tax at source, which together with ISA’s means that you can escape tax on significant amounts of your savings income. ISA’s are still attractive from a tax perspective as, although subject to inheritance tax, from April 2015 ISA’s can be passed on death to spouses without any income or capital gains tax implications.
Stocks and shares ISA’s also protect dividends from income tax. However, from 6th April, all individuals are entitled to the £5,000 dividend allowance, even an additional rate (45%) tax payer.
For those who own their own company consideration could be given to lending money to the business and charging a commercial rate of interest, which from April will be paid tax free. The interest will be a tax deductible expenses for corporation tax purposes and up to £1,000 can be extracted annually from the company tax free by a basic rate taxpayer. Prior to the change, charging interest on a director’s loan was an administrative nightmare, with the company having to withhold basic rate tax and report to HMRC quarterly.
With the changes in dividend tax rates, shareholder directors with overdrawn loan accounts also need to consider, subject to having sufficient distributable reserves, settling their loan with a dividend before the increase in tax rates.
One other point to note is that the Financial Compensation Scheme (compensation paid by the FCA should a bank go bust) has been reduced from £85,000 to £75,000. (On joint accounts the protection is £150,000).
Loss of Pension Tax Relief
For additional rate tax payers (those who earn more than £150,000), the maximum pension contribution allowance of £40,000 will be reduced by £1 for every £2 of income over £150,000. This means that the annual allowance reduces to £10,000 for an individual earning £210,000. Consideration should be given to maximising pension contributions before the 6th April 2016.
At the same time, the life-time allowance (the maximum amount you can build up in a pension pot) will reduce from £1.25million to £1million. Financial advice should be sought on whether a protection election should be made, so as to prevent penalties being incurred should an individual’s pension fund exceed the £1million life-time allowance.
Pensions are again currently being reviewed and it is likely that further changes will be announced in the March Budget.
Help to Buy ISA
The Help to Buy ISA product entered the market in the autumn of 2015 and now there are a number of products on the market offering rates of up to 4%.
You can save up to £1,200 in the first month and £200 a month thereafter over a five year period and the Government will top up the account by 25%, up to a maximum of £3,000.
The account can be opened by anyone who is 16 years old with the intention to buy a property as a home. For parents wishing to help their children buy a property, this is a good way to assist and it also provides a bit of inheritance tax planning. Gifts of £3,000 can be made annually (the inheritance tax annual exemption) or gifts out of income, which can be used by the child to save via the Help to Buy ISA.
All of the above requires financial advice from a qualified financial advisor and maybe the starting point for the New Year is to book a financial review.
Should you wish to discuss any of the above, please do not hesitate to contact us.
Harbour Key Limited 7 January 2016
Financial New Year Resolutions.