Category: Personal Savings
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Updated - 16 March 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 youre in the 20% band for income tax, youll 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, youll 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 youre a 40% taxpayer, youre 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.

Isa allowance  

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:

Personal allowance 

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 youre allowed to earn before you have pay income tax at all. The allowance diminishes when your income exceeds £100,000; in 2016-17 theres 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.  

Marriage allowance  

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 - youre not allowed to use it if they are a 40% taxpayer. 

Dividend allowance

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%.

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.

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

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 youre passing the family home to your children doesnt start until April 2017. 

Stamp duty 

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.

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