New rules for Interest and Dividends
The way that both interest and dividends are taxed has changed from 6 April 2016.
The changes to dividends have been covered in our earlier blog article: Dividend Tax Changes
As explained, with dividends there will be both winners and losers. The good news is the new dividend allowance provides for the first £5,000 of dividends to be tax free, but the bad news is that the rates of tax charged on dividends exceeding this allowance have all gone up by 7.5%.
For those in receipt of interest, there are no losers, although those with the highest incomes will not see any benefit of these rule changes.
The new savings allowance lets basic-rate taxpayers receive up to £1,000 of interest without it generating any tax, whereas higher-rate taxpayers will get an allowance of £500. Those with incomes over £150,000 will not receive an allowance.
It’s estimated that due to these changes 95% of taxpayers won’t pay any tax at all on their savings income from 6 April onwards, and because of that, the banks and building societies will no longer deduct tax at source when they pay interest.
So those who were in receipt of interest after tax will now receive it gross, which is an immediate boost for savers who will see the amount credited to their accounts rise by 25%.
As is often the case with new rule changes, there are exceptions and quirks to how they operate. For example, for those with higher amounts of savings interest, it’s possible to receive up to £6,000 a year in interest and pay no tax at all on it, provided that other income is low enough. Otherwise, for those whose interest receipts exceed their allowances, the tax will need to be paid over to HMRC, usually via filing a self assessment tax return.