25th January 2017 at 11:52am
As we head towards the end of the 2016-17 tax year, here’s a round-up of the tax changes affecting your pensions and savings from April 2016.
New £1,000 personal savings allowance
The Personal Savings Allowance arrived in April, giving basic rate taxpayers the first £1,000 of income from savings tax free. It’s a tax saving worth up to £200 a year.
Higher rate taxpayers get the same tax saving but with a lower allowance of £500 (£500 at 40% is £200) but additional rate taxpayers don’t get any allowance.
On another positive note, any interest from bank and building society deposits is now gross, with no 20% tax deducted at source.
New £5,000 dividend allowance: are you a winner?
There was good news for some when the new £5,000 annual dividend allowance landed last April.
It meant higher-rate taxpayers could be better off by up to £1,250, with additional-rate taxpayers benefiting to the tune of £1,530.
However, some basic rate taxpayers could be worse off by up to £2,025.
The new allowance is a good reason to take a fresh look at where is the most tax-efficient home for your investments and savings.
If you are a business owner looking to extract profits from your company as tax efficiently as possible, you may want to think about the benefits of making pension contributions.
Pension funding is a more tax-effective way to take profits than both salary and dividends. And thanks to recent pension freedoms, business owners have unrestricted access to pension savings from the age of 55.
Lifetime allowance cut to £1m
When the Lifetime Allowance (LTA) was reduced to £1m from April 2016, it led some people to question whether they should keep paying into their pension if it’s likely to reach, or exceed, £1m.
There’s no one answer to this but, with pensions a highly tax efficient way to save, it may make sense to keep contributing even if you need to pay an LTA charge on anything above your allowance in the future.
As we wrote last year, there are a number of myths around what and when the charge kicks in.
You could still claim a higher allowance from HMRC under individual or fixed protection, depending on your pension fund value or whether you have contributed anything into a plan since 5 April 2016. HMRC has the facts on this.
You can read more about the LTA changes and what steps you might want to consider taking if your pension savings look likely to be affected.
It can be a complex area and we recommend taking financial advice before you make any decision.
Lower Annual Allowance
To cap tax relief available to the highest earners, the annual allowance starts to taper when your income is more than £150,000. It could drop to as little as £10,000 a year if your total income is more than £210,000.
However, the taper doesn’t apply if your income minus your own personal pension contributions is under £110,000 – known as threshold income.
How to get your allowance back:
You could regain your full £40k allowance if you have unused carry-forward from previous years and making a large personal contribution takes your income below the £110,000 mark.
Understanding the income definitions is perhaps the hardest part, and taking advice is highly recommended.
Read more about maximising your pension funding in our online guide.
Capital gains tax
Capital Gains Tax reduced – for some
If you invest in mutual funds or shares, CGT rates were cut from 6 April 2016, meaning you pay less tax on any gains.
- 10% in the basic rate band
- 20% in the higher or additional rate band
Gains are added to taxable income to determine the CGT rate used.
Good news here too for trustees and legal personal representatives. The tax rate on trust and estate gains dropped to 20%, down from 28%.
However, landlords and second property owners still pay 18% or 28% on any gains when selling.