Changes to the tax system

Fundamental changes to the tax system to take account of this tax year.

Savings income

Savings income is income such as bank and building society interest. From 2016/17 the Savings Allowance (SA) applies to savings income. Income within the SA is taxed at a new 0% rate (the 'savings nil rate'). An individual's SA in a tax year will be £1,000, except where:

  • they have higher rate income but no additional rate income in the year (in which case their SA is £500)
  • they have any additional rate income in the year (in which case their SA is nil).

Alongside the introduction of the SA, banks, building societies and NS&I have ceased to deduct tax from account interest they pay to customers.

Taxation of dividends

When a dividend is paid to an individual, it is subject to different tax rates compared to other income. From 6 April 2016 new rates of tax on dividend income apply - 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. The equivalent tax rates on other income are 20%, 40% and 45%.

However a new Dividend Allowance taxes the first £5,000 of dividends received in a tax year at 0%.

Tip

Be aware of the amount of your entitlement to the SA and the Dividend Allowance. The Dividend Allowance is particularly valuable if you are an investor. Annual dividends of up to £5,000 are tax free no matter what your marginal rate of tax is.