Personal tax changes for 2016/17

The start of a new tax year generally brings with it a number of changes and 2016/17 is no exception. So what has changed for this year?

The first point to note is that the personal allowance has increased from £10,600 to £11,000. The allowance is now the same for all taxpayers, regardless of the age of the taxpayer – the age-related allowances are no more. The personal allowance continues to be reduced where the taxpayer has income in excess of £100,000. The allowance is reduced by £1 for every £2 by which income exceeds £100,000. This means that taxpayers with income of £122,000 and above for 2016/17 will not receive a personal allowance.

Married couples and civil partners where neither party is a higher or additional rate taxpayer are able to transfer 10% of their personal allowance to their spouse or civil partner. For 2016/17 the transferable marriage allowance is £1,100. This is useful where one partner does not have sufficient income to utilise his or her allowance. Claiming the marriage allowance can save the couple up to £220 in tax in 2016/17.

The income tax rates remain unchanged, at 20%, 40% and 45%. However, the rate at which the higher rate bites is increased to £43,000 as a result of an increase in the basic rate band to £32,000 and the increase in the personal allowance to £11,000.

Also new for 2016/17 is the personal savings allowance. This is only available to basic and higher rate taxpayers – there is no allowance for additional rate taxpayers. The allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers, allowing them to receive, respectively, £1000/£500 of savings income tax-free. Banks and building societies now pay interest gross, removing the need to register for gross payment or reclaim back tax deducted at source. The allowance is available in addition to the 0% savings rate that applies to the first £5,000 of savings income where an individual’s taxable non-savings income does not exceed £5,000,

The new dividend tax regime also came into effect from 6 April 2016. Everyone, regardless of their marginal rate of tax receives a dividend allowance of £5,000, effectively allowing the first £5,000 of dividend income to be received tax-free. Thereafter, dividends are taxed at the new dividend rates – 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Need to know

Make sure you are aware of the changes to the rates and allowances for 2016/17 and what they mean for your personal tax situation.