How your tax will change on 6 April 2016 Which? analyses tax rates and rules for 2016-17
11 March 2016
Updated - 04 April 2016
The tax you pay on savings income will be all but scrapped in April when savers will be allowed to earn £1,000 of interest tax free.
The personal savings allowance comes into force with the new tax year, on 6 April, which also heralds a new £5,000 allowance for dividend income, and new bands for income tax and National Insurance.
Personal savings allowance
The new personal savings allowance means that if you're in the 20% band for income tax, you'll pay no tax on the first £1,000 of interest you get from savings. Currently, 20% tax is deducted by the bank or building society before you get your interest, but the changes will scrap this deduction of tax at source.
If you earn more than £1,000 in interest, you'll have to pay tax through self-assessment (if you already fill in a tax return) or through an adjustment in your 'pay as you earn' tax code. If you're a 40% taxpayer, you're allowed to earn £500 of interest tax-free rather than £1,000.
The new allowance is separate from the Isa limit, so you will be able to get up to £1,000 of interest tax-free from standard accounts, in addition to any tax-free interest you receive from a cash Isa.
Following an increase to £15,240 in the Isa allowance during 2015, 2016-17 Isa limits remain frozen for the year. The following are the amounts you can save in these products tax-free:
- Individual savings account (Isa) limit- £15,240
- Junior Isa limit- £4,080
- Child trust fund limit- £4,080
The tax-free personal allowance is due to rise from £10,600 for 2015-16 to £11,000 for 2016-17.
The personal allowance is the amount of income you're allowed to earn before you have pay income tax at all. The allowance diminishes when your income exceeds £100,000; in 2016-17 there's no personal allowance once your income exceeds £122,000.
Age-related allowance, which previously increased the tax-free allowance of low-earning pensioners, ends in 2016-17. From April 2016 there will be no extra allowance for taxpayers aged over state pension age.
From 6 April, married couples and civil partners will be able to transfer £1,100 of personal allowance (increased from £1,060 in 2015-16) from the lower-earning partner to the higher earner, saving them up to £220 tax. As for 2015-16, you can use this only if the higher earner is a 20% taxpayer - you're not allowed to use it if they are a 40% taxpayer.
Another change sees the first £5,000 you receive in dividends from investments becoming tax free. Above £5,000, basic-rate taxpayers will pay 7.5% tax on dividends, higher-rate taxpayers 32.5%, and additional rate taxpayers 38.1%.
New income tax thresholds
Tax rates remain unchanged, with basic rate tax at 20%, higher rate tax at 40% and additional rate tax at 45%.
- Basic rate (20%) tax applies to income after personal allowance and below £32,000 (currently £31,785)
- Higher rate (40%) tax applies to income between £32,001 and £150,000 (currently £31,786 and £150,000)
- Additional rate (45%) tax applies to income over £150,000 (unchanged from 2015-16).
New National Insurance thresholds
Normal National Insurance rates remain unchanged, but from 6 April 2016, 'contracting out' will end and employees who previously qualified for a reduced rate will see this rise.
- Class 1 National Insurance (employees) is payable on income between £8,060 and £43,000 at 12%. Above £43,000 the reduced rate of 2% applies.
- Class 2 National Insurance (self-employed) is payable on income above £5,965 at £2.80 per week
- Class 4 National Insurance (self-employed) is payable on income between £8,060 and £43,000 at 9%. Above £43,000 the reduced rate of 2% applies.
Capital gains tax
Rates for capital gains tax - which you pay on substantial profits from the sale of assets and possessions - will drop to 10% for basic rate taxpayers and 20% for higher rate taxpayers in 2016-17. However, on residential property the rate will remain unchanged at 18% for basic rate taxpayers and 28% for higher rate taxpayers. The capital gains tax allowance remains unchanged at £11,100 - this is the gain you can make before this tax is payable.
Inheritance tax rules remain unchanged in 2016-17, with the tax-free amount frozen at £325,000 and the tax above that level set at 40%. The extra allowance available if you're passing the family home to your children doesn't start until April 2017.
Landlords and second-home owners will have to pay an extra 3% in stamp duty for second properties bought after 1 April 2016, which was announced in the 2015 Budget. This is on top of the normal rate (0% on the first £125,000, 2% for £125,001 to 250,500, 5% for £250,001 to £925,000, 10% for £925,001 to £1.5m and 12% above £1.5m). The 3% supplement is charged on the entire value of the second property.