The 2016/17 tax year has seen the introduction of
• £5,000 Dividend Nil Rate: - commonly called the Dividend tax allowance. Remember this can only be used against dividend income – not savings income. This replaces the tax credit, which previously covered the basic rate income tax liability for dividends.
• The Personal Savings Allowance, which may be £1,000, £500 or nil. All basic rate taxpayers, being individuals without any income chargeable to tax at the higher or additional rates or the dividend upper or dividend additional rates, are entitled to a £1,000 allowance. This allowance can only be used against savings income which includes interest, accrued income profits, gains from certain life insurance contracts and income from certain purchased life annuities.
The Personal Allowance is £11,000 for 2016/17, but it interacts with both the Dividend Tax Allowance and the Personal Savings Allowance. The taxpayer may choose the order of using the Personal Allowance where there is more than one class of income i.e. earned income, dividend income and savings income in order to achieve “the greatest reduction in the taxpayer’s liability to income tax”.
Income tax is generally now not deducted from interest paid by banks and building societies to individuals (since 6th April 2016). It is expected only 5% of savers are likely to pay income tax on interest received in 2016/17. People receiving relatively small dividends are not likely to be liable to income tax on the dividends.
However, if you are able to ensure you receive £5,000 dividend income and £1,000 savings income (interest received) whilst remaining a basic rate income tax payer then you can maximise your income after tax.
We can assist small business owners with planning their affairs to maximise their income where the circumstances permit. Please contact us sooner rather than later however, as six months of the fiscal year have already passed.
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