Let’s take Fido for a walk!
It’s that time of year when every good financial adviser can think only about tax.
As the 5th April approaches and we digest the latest of the Chancellor’s Budget changes, the opportunity to do something about it all is narrowing fast.
What should we focus on?
As always, if you are one of our clients we will have applied our annual checklist to your affairs and if there’s anything to do we will already have discussed it with you. It’s also true, though, that there are a large number of changes coming in to effect this year, and it’s almost certain that some of them will affect you.
There’s an old saying that you shouldn’t let the tax tail wag the investment dog, but that’s not to say that you shouldn’t take the dog for some exercise every so often. So let’s get the lead and Fido’s favourite stick from the cupboard and set off…
Fido loves to run about on the open common where everyone else heads first. There you’ll encounter lots of changes to tax allowances and the ways in which your savings will be taxed.
Firstly the personal allowance (the amount you can earn before you pay tax) will increase by £400 on 6th April to £11,000. The Chancellor has just announced that it will go up again in April 2017 to £11,500 which should save most people more tax. For most of us this will be dealt with through PAYE so there’s nothing to do.
There are changes coming to savings and investment income that could be more problematic though. Firstly tax will no longer be deducted from your bank or building society interest, but from 6th April you will have a new £1,000 tax free interest allowance. If you complete a Tax Return you will still need to declare the interest, however you will only pay tax on the amount above £1,000.
If you have, say, £50,000 in an account earning 2% interest you’ll be up to this limit. The allowance is halved if you’re a higher-rate (40%) taxpayer though, so the interest on £25,000 could mean you’ll need to complete a tax return if you don’t do so already.
The tax on dividend income is also changing. At present dividends are treated as ‘basic-rate tax paid’. From April this will all change and you will have a new tax free dividend income allowance of £5,000, but anything over this will be subject to tax of 7.5% if you’re a basic rate
taxpayer, 32.5% for higher rate taxpayers, and 38.1% if you pay tax at the additional (45%) rate. If you complete a Tax return you will still need to declare the dividends, however you will only pay tax on the amount above £5,000.
If you own a property that is let to tenants, there are changes ahead that could make the difference between a healthy profit from your investment and a loss. The tax relief on mortgage interest for buy-to-let properties is gradually being withdrawn from this year, and the way that you account for it is also changing. If you have a portfolio of properties this could be a real problem for you, and you’ll need good advice to decide how to respond.
In the light of these changes you might want to review your journey across Tax Common and consider a different route to avoid tax next year.
You could, for example, transfer cash or shares to your spouse to make better use of both your allowances, something you may not have needed to do before.
Our Accounts Team has a map of Tax Common and we can show you the best way to cross.