This has been a big week for anybody who is serious about saving for their future, with three important tax changes kicking in from Wednesday 6 April. They affect your investments, savings and state pensions, but will they help you as much as the Government would like you to believe?
Dividend allowance
The new dividend allowance has attracted the least attention of the three, but is likely to have the biggest impact on investors. This replaces the dividend tax credit and means that investors can now take the first £5,000 of income from dividends free of tax, even if held outside an ISA, and regardless of your tax bracket.
This comes on top of your personal allowance, which rose to £11,000 this week, and means that some could earn £16,000 a year free of tax (with Isa dividends on top of that). The downside is that dividends above this limit will be subject to higher tax rates. This will be charged at 7.5% for basic-rate taxpayers (previously they paid nothing), 32.5% for higher-rate taxpayers (up from 25%) and 38.1% for additional-rate taxpayers (against 30.55% before).
This will raise an estimated £6.8 billion for the Treasury and hit self-employed contract workers who have set up a limited company to take their earnings more tax efficiently. For investors, it underlines the benefits of buying stocks and shares using your ISA allowance, where dividend income is free of tax no matter how much you earn, as are capital gains, benefits that can also be inherited by a spouse or civil partner (but not your children).
Personal savings allowance
The new personal savings allowance allows basic-rate taxpayers to earn up to £1,000 interest a year without paying income tax. That falls to £500 for 40% taxpayers, but additional rate 45% taxpayers — those earning £150,000 a year or more — do not qualify. The allowance applies to bank and building society accounts, credit unions and National Savings & Investments, income from Government and corporate bonds, and most types of purchased life annuity.
Your cash ISA allowance is on top of this, but given today’s dismal rates and the fact that basic rate taxpayers can now hold £69,000 in the average savings account before paying tax, this strengthens the arguments in favour of using your stocks and shares ISA allowance instead.
New state pension
The new state pension sound better than the old scheme in theory but the practice is disappointing. The first problem is that the so-called flat rate of £155.65 a week isn’t a flat rate at all, you need to have made 35 years of qualifying National Insurance contributions to get the full rate — up from 30 years before.
The self-employed, women and the low paid will be the big winners, as they should get more. The big losers will be younger workers who will no longer build up extra pension entitlement through the state second pension. Those in their 20s could lose on average £19,000 across their retirement, according to the Pensions Policy Institute.
Even if you get the maximum amount £155.65 a week is worth just over £8,000 a year. If you want a comfortable retirement you have to invest as much as you can afford on top of that, and the best way to build long-term wealth is through stocks and shares.