Following any UK Budget there is a period of reflection to assess the impact the announcements may have, and what can or should be done before they take effect. Here are three key areas that ought to be considered and planned for if you have UK income or are planning to return to the UK
By Adam Thompson
Taxation of Dividends
New taxes will apply to those taking dividend payments. In short, these changes are a good example of the government giving with one hand and taking away with the other. The initial headlines referenced the main changes, namely an introduction of a £5,000 allowance, the abolition of the 10% tax credit and an increase in the tax rates. The impact of these changes can be significant, and the table shows the effect and the levels of dividend income at which the pendulum swings:
|Income Tax Rate||Net dividend income||Tax due at 2015/16 rates||Tax due at 2016/17 rates|
The changes may therefore require some careful tax planning, particularly when it comes to allotting dividend income between spouses. Best practice is no longer to ensure that the spouse with the lower income receives all of the dividend income, as this will mean wasting the allowance of the higher earning spouse. Individual advice is vital.
Taxation of Interest
From 6 April 2016 banks will no longer withhold basic rate tax on interest paid. In addition, a personal savings allowance of £1,000 will apply for basic rate taxpayers, with higher rate taxpayers allowed £500.
The impact of this change is straightforward. In simple terms, from 6 April 2016 if your total taxable income is below £16,800 then no tax will be due on interest income.
If the total taxable income is below £42,700 then no tax will be due on the first £1,000 of interest received. This could equate to a tax saving of up to £200.
If the total taxable income is between £42,701 and £150,000 then no tax will be due on the first £500 of interest received. This could equate to a tax saving of up to £200.
Taxation of Rental Income
From April 2016 the 10% wear and tear allowance which is allowable as a deduction against furnished residential property income will be abolished. It will be replaced by a new relief which allows all residential landlords to deduct the actual costs of replacing furnishings.
This is good news for landlords of unfurnished properties. Under current rules, which have been in place since April 2013, there have been no reliefs for replacement of fixtures in unfurnished properties with the exception of fitted appliances. Under the new rules, landlords will be able to claim relief for the replacement of freestanding appliances, curtains, carpets etc.
The advice to landlords of unfurnished properties is therefore to put off any expenditure on fixtures until after 6 April 2016, where possible.
Landlords of furnished residential property will simply lose the 10% reduction in the gross rental income from 6 April 2016. However, it will still be possible to claim the actual costs of replacing furnishings going forward.
The advice is therefore the same – put off any expenditure on furnishings until after 6 April 2016 where possible.
For those renting a room there is some good news. From 6 April 2016 the level of rent-a-room relief will increase from £4,250 to £7,500.
Landlords with mortgages on rental properties should note that higher rate tax relief on mortgage interest payments is to be phased out from 6 April 2017. Those owning commercial property or furnished holiday lets should rest assured that this restriction will not apply.
Adam Thompson is Tax Manager at The Fry Group