The Chancellor today unveiled a faster than expected rise in the higher rate tax threshold as part of a series of measures affecting income and savings in the emergency summer Budget.
George Osborne also announced a bigger than expected increase in the personal tax threshold and a surprise boost for investors, who will benefit from tax free dividends from next year.
Here, we explain what the announcements mean for you.
Income tax thresholds
The Chancellor confirmed his commitment to increase the threshold for the higher rate of income tax over the course of this parliament.
He announced that the threshold will go up to £43,000 from April 2016. The current higher rate tax threshold for the 2015/16 tax year is £42,385.He also reiterated his commitment to increase it to £50,000 by the end of the parliament. Income above the threshold is taxed at 40%.
Income Tax: How the Summer Budget 2015 will affect you
|Your Income||Income tax bill this year (2015/16)||What you would have paid next year, before today’s announcement||What you will pay next year, taking into account today’s announcement||What you gained from today’s announcement|
Source: Which? Money analysis
The changes mean that a couple will be able to earn six figures between them without incurring higher rate tax by 2020.
Basic rate tax will remain at 20%, while the additional 45% rate of tax for those earning more than £150,000 will remain in place, despite some speculation before the Budget that it was set to be scrapped.
Find out more: Income tax explained
Mr Osborne has also ratcheted up his plans to raise the personal tax-free allowance. This will now be increased to £11,000 for the 2016/17 tax year – higher than the £10,800 figure that had been announced previously. It is currently £10,600.
He said his aim remains to increase the personal allowance to £12,500 by 2020.
Tax free dividends
When you invest in the stock market, you receive your share of company profits through dividends. Currently, these have 10% deducted at source. The Chancellor announced that he will abolish this deduction.
Instead, investors will receive a £5,000 allowance, meaning the first £5,000 of dividend income will be tax free. After this, a basic tax rate of 7.5% will apply. A higher rate of 32.5% will also apply for higher rate taxpayers, and 38.1% for additional rate taxpayers. This reform will come in for the 2016/17 tax year.
Tax on savings
In his March Budget, the Chancellor announced a new personal savings allowance that would let basic rate taxpayers receive £1,000 of interest tax free from the 2016/17 financial year. The threshold will be £500 for higher rate taxpayers. Additional rate tax payers will need to pay tax on all interest.
He said the combination of the personal savings allowance, higher personal tax threshold, and dividend allowance meant that basic-rate taxpayers could receive £17,000 of annual income tax free from April 2016.
Find out more: Tax on savings and investments