So what has changed in the Budget?
Most of the changes announced in the recent summer Budget are coming in from April next year, but there are some which will have impact sooner.
Changes to taxation of interest and dividends
We already have a 0% band for savings income (excluding dividends), but this can be hard to access. If your taxable income before savings income is under £15,600 you may be able to make use of this now (see tax rates for savings).
From April 2016 a completely new system is proposed. This will see the first £1,000 of savings interest exempt from tax (for basic rate taxpayers) and the first £5,000 of dividend income exempt from tax. Anyone with dividend income over £5,000 will pay tax on it at new dividend rates. Where dividend income is more than £5,000, the proposed rate on dividends for basic rate taxpayers will be 7.5% from April 2016.
Changes to taxation of savings income also mean that banks and building societies will stop taxing interest at source. This means that the R85 procedures (to avoid paying tax at source) will no-longer be needed. If you have savings interest of more than £1,000 you will need to contact HMRC to pay any tax due.
From April 2016:
- The Rent-a-room allowance is being increased from £4,250 to £7,500. This covers income from a lodger in your home. It can also apply to small B&B businesses
- Tax relief on furnishings and equipment for landlords of residential property is being reformed. The 10% ‘wear and tear’ allowance is being scrapped. Instead landlords will claim for the actual costs of replacing furnishings
- Finance costs on buy to let property is being restricted to basic rate tax relief only. This will be phased in from April 2016
Direct recovery of HMRC debts from your bank account
HMRC is due to be given powers in the summer 2015 Finance Act to take money directly from bank accounts – including ISAs and other savings accounts. This will be subject to certain safeguards, such as a face to face meeting and the right of appeal to the courts.
Tax credit changes
Significant cuts in tax credits have been announced. You can find out more about these on the LITRG website at – Tax credit cuts.
Tax free personal allowance
This is due to increase from £10,600 this year to £11,000 from April 2016. The target is for the allowance to reach £12,500 in due course.