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New tax rules for dividends and interest

The tax treatment of your savings will be changing in April with important consequences.

The two Budgets of 2015 both made changes to the 2016/17 tax treatment of investment income.

Personal Savings Allowance

This new allowance will mean that if you are a higher rate taxpayer, the first £500 of interest you earn in a tax year will be free of tax. If you are a basic rate taxpayer, your allowance is £1,000. Additional rate taxpayers will not receive any of the new allowance.

Dividend tax reform

The reworking of dividend taxation was one of the surprise announcements in the July Budget. It has three components:

 

  • Everyone (including additional rate taxpayers) will have a £5,000 dividend allowance, so the first £5,000 of dividends you receive will be tax-free.
  • 10% non-reclaimable tax credits disappear.
  • On dividends above the allowance, basic rate taxpayers will pay 7.5% tax, higher rate taxpayers 32.5% and additional rate taxpayers 38.1%.

 

If you are a higher rate taxpayer, you will be better off unless your dividend income exceeds £21,667 (£25,250 if you pay additional rate on all your dividends). If you are a basic rate taxpayer, you start to lose once dividend income exceeds £5,000.

Couples may need to review who owns what investment. The sooner you start planning for these new rules, the sooner you can benefit.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.