April 2016-Personal Tax Accounts (savings & divi allowances)

C_Mababejive

Not sure if this has already been discussed although ive seen chat about the 1k savings allowance and also the 5k divi allowance and it is clear that a lot of people are totally confused and ill prepared for what is coming our way in April 2016.

I thought a common single discussion might help to pull it all together.

In April 2016 HMRC will press the start button on Personal Tax accounts.

https://hmrcdigital.blog.gov.uk/2015/08/04/introducing-the-personal-tax-account/

https://www.tax.service.gov.uk/personal-account/start

The bottom line will be that if you exceed the 1k savings limit or the 5k divi limit then HMRC will kindly adjust your PAYE coding and collect further tax due via your pay.

A few thoughts/questions i have in mind are;

How often and how quickly will HMRC adjust PAYE codes since money held in savings accounts can change from day to day

What rates of tax will be applied for sums in excess of 1k savings or dividends in excess of 5k divis for basic rate taxpayers

What counts as a savings account?

What counts as a dividend?

Will HMRC be pinching money from peoples wages willy nilly perhaps incorrectly, how will people know and how will they track and challenge this?

What if you are retired/dont have paye accounts?

C_Mababejive

If you receive a letter about personal tax accounts, are you obliged to register for it? There must be plenty of people who dont have a clue bout it,dont have access to computers, cant/dont know how to use one etc etc..with only three months to go,this looks like a disaster in the making..

talexuser

C_Mababejive wrote: »

What rates of tax will be applied for sums in excess of 1k savings or dividends in excess of 5k divis for basic rate taxpayers

If you stay within the basic rate band, and have used up all your personal allowance, then savings interest above 1k will be taxed at the normal 20% and dividends above 5k at 7.5%.

Once you are in the higher rate band the savings allowance drops to £500, and any dividends above 5k will be taxed at 32.5%.

I agree if it all goes smoothly next April it will be a miracle.

polymaff

The two things I expect to confuse folk in 2016/17 are:

1. Though there are 0% bands - all income in those bands is taxable income and so is part of deciding your marginal tax rate.

2. When calculating the Personal Savings Allowance situation, dividend income is included in the calculation (see 1, above) - even if that dividend income is taxed at 0%. I believe that this is the first time that tax on savings income has been a function of dividend income.

As a result there will be folk who only get the £500 PSA and yet will not pay a penny of tax at higher rate. Tax Simplification? Huh!

talexuser

Yes, it is complicated to headline say you have a tax free allowance for savings and a tax free allowance for dividends, but then small print say it all counts towards your total gross and therefore affects tax rate.

kidmugsy

talexuser wrote: »

Yes, it is complicated to headline say you have a tax free allowance for savings and a tax free allowance for dividends, but then small print say it all counts towards your total gross and therefore affects tax rate.

The mistake is in using "allowance" and thereby implying that it will be like the Personal Allowance. For anyone near the higher rate threshold it won't be.

polymaff

kidmugsy wrote: »

The mistake is in using "allowance" and thereby implying that it will be like the Personal Allowance. For anyone near the higher rate threshold it won't be.

Agreed, although I think that the underlying problem is the introduction of all sorts of new ideas - good ideas, but badly implemented. For instance, the PSA introduces incremental income tax rates of over 10,000% (yes, ten thousand) for some.

melbury

Does that mean that dividends received from companies such as M&S etc will be higher after 5th April 2016 because no tax will have been deducted?

Apologies in advance if this sounds totally thick:(

Eco_Miser

melbury wrote: »

Does that mean that dividends received from companies such as M&S etc will be higher after 5th April 2016 because no tax will have been deducted?

No, because no tax has been deducted for several years now. The 10% notional tax credit was added to the actual dividend, then taken away again.

bowlhead99

melbury wrote: »

Does that mean that dividends received from companies such as M&S etc will be higher after 5th April 2016 because no tax will have been deducted?

Apologies in advance if this sounds totally thick:(

No. Nothing is deducted at source NOW either. I'm sure this has come up before on threads you were in...

To expand on what Eco said:

At the moment if M&S declare a 90p dividend on each one of their shares, they send 90p per share to all of their investors and all those investors receive the full 90p. No tax has been deducted or paid to HMRC out of that 90p dividend that M&S can afford to send out.

The only tax suffered at the company level is the corporation tax that M&S had to pay on their total profits before deciding that the amount of money left in their bank account was enough to run their business for the next few years and still pay out 90p per share to their investors. There is no withholding at source on that 90p paid out, you all receive it in full.

What happens at the moment is that HMRC gross up the 90p by 1/9th and say "Hey, you've notionally received 100p of dividends. As a basic rate taxpayer you owe 10% on that 100p, which is 10p. Ah, we see you've received 90p which is 10p lower than the notional gross dividend of 100p. So that 10p 'tax credit' will satisfy your obligation and you need pay nothing more.

So a basic rate payer receives the full 90p that M&S sent, and pays nothing more.

However a high rate taxpayer is told "Hey, you've notionally received 100p of dividends. As a high rate taxpayer you owe 32.5% on that 100p, which is 32.5p. Ah, we see you've received 90p which is 10p lower than the notional gross dividend of 100p. So that 10p 'tax credit' will partly satisfy your obligation to pay 32.5p. You owe us another 22.5p in cash.

That 22.5p in cash that the high rate taxpayer owes is conveniently 25% of the 90p he received.

So, at the moment with a 90p dividend sent by M&S, basic rate payers pay 0p in further tax and keep the whole 90p, while high rate taxpayers pay 22.5p in further tax (a quarter of the whole 90p). But nothing is withheld at source by the taxman. The taxpayer, if a higher rate taxpayer, works the figures out himself and manually sends a quarter of the dividends received, at some point after year-end.

Going forwards, M&S will still send 90p if that's what they can afford to pay out having considered the needs of their business. A lower rate taxpayer within his annual dividend allowance will pay no tax, just like he paid no tax before. But he won't magically get any more than he got before, because M&S are still only paying 90p.

A higher rate taxpayer within his annual dividend allowance will now also pay no tax so that when M&S send him the 90p he can keep it all and not send anything to HMRC at the end of the year ih he hasn't breached the allowance, instead of handing a quarter of it over like he used to.

Someone who is over their annual dividend allowance, whether a lower or higher rate taxpayer, will have to pay tax. This is a change for basic rate payers who previously paid nothing. However, the rate at which they're paying the tax is quite low - only 7.5% of the 90p compared to their 20% general income tax rate. Higher rate taxpayers over the limit now pay tax on the 90p at a rate of 32.5% - 29.25p. This is higher than the old 'one quarter' rate of 22.5p, but still lower than the 40% they pay on other general income and is only going to kick in after the annual allowance is used up.

HTH

C_Mababejive

>bowlhead<
Someone who is over their annual dividend allowance, whether a lower or higher rate taxpayer, will have to pay tax. This is a change for basic rate payers who previously paid nothing. However, the rate at which they're paying the tax is quite low - only 7.5% of the 90p compared to their 20% general income tax rate. Higher rate taxpayers over the limit now pay tax on the 90p at a rate of 32.5% - 29.25p. This is higher than the old 'one quarter' rate of 22.5p, but still lower than the 40% they pay on other general income and is only going to kick in after the annual allowance is used up.
<unquote>

Exactly,,what they did at the last budget was announce a tax rise for basic rate taxpayers and at the same time, make it sound like they were giving people something extra...a triumph of spin..which is only now beginning to unravel..