There have been key changes to the UK tax system in the past year and those who have never had to report their income to HMRC may now need to do so. This document sets out how who is most likely to be affected by these changes.
Savings and Dividend Income : Important Tax Changes To Be Aware Of
Under the previous regime, if you received dividends and were a basic rate taxpayer, you would have no tax to pay on those dividends.
With the new regime, a basic rate taxpayer could see their tax liability increase dramatically.
Consider the following example: Mr Wright receives £11,000 of pension’s income and £28,000 of dividends from an investment portfolio.
• In the 2015/16 tax year, Mr Wright would have had no tax liability on this income.
• In the 2016/17 tax year, Mr Wright would have to pay £1,725 of tax on this income.
There are winners and losers under this new dividend taxation regime, with the winners being those whose annual dividend income is under £5,000. Those with dividend income over £5,000 may have to register with HMRC to complete a tax return, whereas previously they may not have had to do so.
If you think you may be affected by the above rule changes, please get in touch with us here at Everfair Tax. Our tax advisors have many years of experience in getting clients up to date with HMRC and ensuring the correct amount of tax is paid. We can also advise on tax-efficient planning strategies to ensure you and your family are not paying too much tax. If you would like any further advice, please feel free to give us a call on 01932 428522.
Taxation of Bank Interest
Prior to 6 April 2016, if you held an interest bearing account with a bank or building society you would only receive 80% of the interest payments – with the other 20% comprising basic rate savings tax which was paid to HMRC directly by the bank. This system ensured that basic rate taxpayers did not have to report their savings income to HMRC on an annual tax return.
Since 6 April 2016, banks are no longer required to deduct tax on interest payments, and account holders will now receive 100% of the interest due to them. HMRC also introduced a new annual “tax-free savings allowance” of £1,000 with effect from 6 April 2016 to ensure that the majority of basic rate taxpayers can continue to receive bank interest without having to complete a tax return.
Despite the new savings allowance, there will still be some basic rate taxpayers who will have a tax liability for the 2016/17 tax year. As a general rule anyone with more than £16,000 of non-savings income (e.g salary or pensions) and more than £1,000 of annual bank interest will need to pay tax to HMRC.
There are three options for ensuring the tax payment is dealt with correctly:
• Call HMRC and ask to have the tax paid from salary/pensions income through the PAYE system
• Register with HMRC to file a standard self-assessment tax return
• Settle the tax via the new “simple assessment” whereby HMRC issue a tax demand for the outstanding tax, with the amount due by the following January.
It is anticipated that HMRC will be writing to potentially affected taxpayers from August 2017, which will include those who receive interest in excess of the savings allowance. Those who do not receive a letter, but believe they have tax to pay, should take action before 5 October 2017, which is the deadline for notifying HMRC of a tax liability for the 2016/17 tax year. Those who do not notify by 5 October 2017 may be liable for a late notification penalty.
Simple assessments are due to be rolled out by HMRC this year, with further guidance anticipated by the end of September 2017.
Higher rate tax payers, those with total annual income over £43,000, have a lower savings allowance of £500. Any higher rate taxpayers who do not currently complete tax returns should contact HMRC if their annual saving income is in excess of £500.
HMRC Information Powers
Financial institutions are obliged to provide HMRC with information about interest received by UK resident individuals. As HMRC now have access to this information they will be able to use this to pursue potential unpaid tax from individuals who are not already on their records. HMRC have the power to charge penalties for those who do not comply with their tax obligations on time, but are more lenient in cases where taxpayers disclose income voluntarily, i.e. without having been chased by HMRC first. With that in mind, it is important to ensure any undeclared tax is disclosed to HMRC before you receive a letter from them.
Taxation of Dividends
The taxation of dividend income has changed significantly with effect from 6 April 2016. Prior to this date, dividends were paid with a notional 10% “tax credit”, which had to be added to the dividend before calculating the tax. The same 10% credit would then be deducted from the tax due. This credit has now been abolished and tax is payable at a flat rate, based on the actual dividend payments received. As well has abolishing the tax credit, HMRC has introduced a £5,000 tax-free dividend allowance which means no tax is payable on the first £5,000 of dividends received in a year.
Finally, the tax rates payable on dividends have changed, as set out in the table below