2016/17 Tax Returns and Tax Rates attached to Dividends and Interest
Whilst the deadline for online submission of the next annual Self Assessment Tax Return is not until 31 January 2018 we would advise that your tax returns are not left to the last minute due to the number of changes introduced to the tax rates for the 2016/17 period.
An area which may affect many director/shareholders, and also some individuals with large shareholdings, are the increased tax rates which are now attached to dividends. From 6 April 2016 the dividend tax credit was abolished and replaced with tax rates where the first £5,000 of dividend income would be taxed in a 0% band (also called the “Dividend Allowance”). Following this, dividends within the basic rate band will be taxed at 7.5%, then 32.5% in the higher rate tax bracket followed by 38.1% in the additional rate bracket.
For those with significant dividend income, these rates will mean an increased tax liability with higher tax payments falling due for January 2018 onwards – as such it would be sensible for your tax return to be prepared as early as possible so you are aware in plenty of time with regards to your upcoming liabilities.
This is particularly relevant where a taxpayer has previously had no additional tax liability, and for 2016/17 their tax liability exceeds £1,000. In this situation it is likely that they will be required to make advance ‘payments on account’ towards their expected 2017/18 tax liability. These are additional payments due in January 2018 and July 2018, with each payment being 50% of the additional liability for the year.
As you may have noticed, banks and building societies are no longer deducting tax at source on interest income, meaning as an individual you receive the income gross. This is because the Government introduced the Personal Savings Allowance (PSA) which taxes the income at 0% where it would otherwise be taxed at 20% or 40%.
The PSA for basic rate tax payers is £1,000, or £500 for higher rate tax payers. There is no PSA for additional rate tax payers.
Where your non-savings income (being salary, pensions, business profits and rents) has been covered by your personal allowance, and your interest income falls into the first £5,000 of your basic rate band the income will be taxed at 0%. Note that non-savings income does not include dividend income.