From 6 April 2016, fundamental changes to the taxation of dividends and interest were introduced. HMRC continue to talk about reduced administration for taxpayers, however, these latest changes are likely to result in many more people being required to file a tax return. With the move towards digital tax accounts and quarterly reporting, it is hard to see how tax administration is going to get any easier.
Previously, an individual receiving gross dividends up to the basic rate i.e. £42,385 in 2015/16 (assuming no other income) would not have had a tax liability and would not have been required to file a tax return.
Now, however, the same individual will only be able to receive dividends of up to £16,000 before becoming subject to tax and required to self assess. With a personal allowance of £11,000 and dividend allowance of £5,000, any dividend income above this would be subject to tax at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
From April 2016, banks and building societies have begun to make interest payments without deducting tax. Previously, banks withheld 20% tax on interest payments to individuals. Therefore, only higher or additional rate taxpayers would need to pay any additional tax due on interest via a tax return.
The change to pay interest gross is due to the introduction of a new Personal Savings Allowance. This new allowance is set at £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and nil for additional rate taxpayers.
Any taxpayers receiving interest income in excess of the above allowances, and after taking into account any relief under the existing starting savings rate, will need to self-assess to settle their additional tax liability. Therefore, all taxpayers will now have the responsibility of checking the annual interest income they have received and working out whether they have any tax to pay.
As an aside, it should be noted that other companies making interest payments will still need to deduct tax at source, so CT61s will still be required, for example, in respect of payments on a director’s loan account.
These changes are mainly likely to affect basic rate taxpayers by bringing them within the self assessment regime and could catch the unwary out, not realising they are now required to file a tax return. If you come within the self assessment net for 2016/17 you will need to register with HMRC by 5 October 2017 and file your first tax return and pay any tax due by 31 January 2018.