With the tax return deadline just two weeks away, the Which? Money experts are answering your self-assessment queries. You can submit your questions to email@example.com, or via our Facebook or Twitter pages.
Q: I have power of attorney over my mother’s affairs. She is not normally required to submit a tax return (she has dementia and could not complete one herself, in any case).
However, I am concerned that the new limits on untaxed interest and dividends will now require this, yet I have not seen any general advice or publicity to this effect.
If she earns over the stated tax-free limits, do I have to start completing self-assessment returns on her behalf?
Submitted via Which? Money Magazine.
A: It’s true that you may need to submit a tax return on your mother’s behalf. Whether or not this is necessary depends on the amount of savings interest and dividends have been earned during the tax year – keeping in mind that the rules were changed in April 2016.
Which? explains how interest and dividends are taxed under the current rules and how to submit to HMRC.
How the tax-free dividend allowance works
As of the 2016-2017 tax year, new rules were introduced that changed the way dividends are taxed.
Under the new system, you can earn £5,000 in dividends before you need to pay tax. This is your annual ‘tax-free dividend allowance.’
The same threshold will apply in the 2017-2018 tax year.
For any dividends you earn above this limit, you’ll pay tax at the same rate as your other income – either 7.5% for basic-rate payers, 32.5% for higher-rate pays or 38.1% for additional rate payers.
Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an Isa, will continue to be tax-free.
Use our dividend tax calculator
To quickly work out how much tax you’ll have to pay, try our dividend tax calculator.
How to pay HMRC tax on dividends
If the total income from investments is more than £10,000 before tax, a self-assessment tax return will need to be completed to declare this. You will need to register your power of attorney status with HMRC in order to fill out this information for your mother.
If the amount of dividends earned is lower than £10,000, you’ll need to tell HMRC – either ask them to change your tax code, or include the interest in your self-assessment tax return (if you already file one).
Make sure you submit your return on time – the deadline is 31 January 2018. If you’d like help submitting online, the Which? Tax Calculator is jargon-free, easy-to-use and sends your return direct to HMRC.
Tax on savings
The amount of tax-free interest you can earn on your savings depends on your income.
As of the 2016/2017 tax year, the Personal Savings Allowance will apply, meaning basic-rate (20%) taxpayers can earn up to £1,000 of tax-free interest on their savings. Higher-rate (40%) taxpayers can earn up to £500 of tax-free interest, while additional-rate taxpayers don’t receive a savings allowance.
If your savings exceed your personal savings allowance, the excess amount will be taxed at your usual tax-rate.
This personal savings allowance applies to interest earned from non-Isa savings accounts, other current accounts, government or corporate bonds, peer-to-peer lending interest and interest distributions – i.e. income from funds or investment trusts that invest in bonds.
If you’re a low income-earner, you’ll also benefit from the starting rate for savings, which means you can earn a maximum of £5,000 in savings interest tax-free. For every £1 you earn in total over the Personal Allowance (which was £11,000 in the 2016/2017 tax year), your starting rate will drop by a £1. So if you earned £14,000 total in that year, your starting rate would be £2,000.
- Find out more: The Which? guide to income tax on savings and investments.
How to reduce your tax bill
One of the most popular ways to save on tax is to use your tax-free Isa allowance – the limit is £20,000, and applies to cash Isas and stocks and shares Isas.
National Savings & Investments (NS&I) offers several tax-free products, such as a cash Isa and savings certificates, which could be worth considering.
- Find out more: 30 ways to save on tax