On 9 December, just in time for Christmas, the Government published a number of draft clauses that will make up the majority of measures for inclusion in the 2016 Finance Bill. This information comes at least three months prior to the introduction of the Bill itself, which provides taxpayers with certainty about future changes and allows time for pre-legislative scrutiny.
The consultation on draft clauses is intended to ensure the legislation works as intended. The final contents of the Finance Bill 2016 will be subject to confirmation at Budget 2016, which is scheduled for 16 March.
Many of the measures covered in the draft clauses were first announced in either the March or summer Budgets of last year and, as such, consultations on policy have been carried out over the spring and summer where appropriate.
So, what we have is not the complete Finance Bill but a (significant) number of draft clauses for consultation. Where secondary legislation will give substantive effect to a Finance Bill clause, this has also been published in draft.
In order to provide as much background and context as possible each clause is accompanied by:
- A tax information and impact note, which sets out what the legislation seeks to achieve, why the Government is undertaking the change and a summary of the expected impacts
- An explanatory note, which provides a more detailed guide to the legislation.
The Government has asked for any comment on any of the draft clauses by Wednesday 3 February.
Over the next couple of weeks I am going to consider those draft clauses I believe are of direct or indirect relevance to the delivering of financial advice. I will break my consideration down into the headings used in the HM Revenue & Customs overview of the draft legislation for consultation.
Savings and dividends: The personal savings allowance
As announced at March Budget 2015, legislation will be introduced in the Finance Bill 2016 to provide for a new tax-free personal savings allowance for individuals. This will apply a 0 per cent rate for up to £1,000 of savings income, such as interest paid to an individual (or £500 for individuals with any income subject to higher rate tax). The PSA will not be available to individuals with any income subject to additional rate tax.
Alongside the introduction of the PSA, banks, building societies and National Savings and Investments will cease to deduct tax from the account interest they pay to customers. These changes will have effect in relation to savings income paid or credited on or after 6 April.
Following consultation, the Government is also considering the case for changes to the tax deduction and withholding rules for authorised investment funds, investment trusts and peer-to peer loans, and expects to provide an update as soon as possible. A summary of responses to the consultation was published on 9 December.
This change to the taxation of savings income is one financial advisers definitely need to be aware of. The new PSA is not scaled back in any way by reference to income levels, as is the case for the 0 per cent starting rate band (see below). The PSA will deliver tax-free income (and investment bond gains, which are classed as savings income) over and above that which is tax free inside an Isa, registered pension scheme and the ordinary personal allowance up to the limits stated.
Starting rate for savings
As announced in the Autumn Statement, the limit for the 0 per cent starting rate band for savings income will be retained at its current level of £5,000 for 2016/2017.
This is in addition to the PSA described above. However, the 0 per cent starting rate will only apply if non-dividend savings income falls within the 0 per cent savings rate band (£5,000) after taking into account all non-savings income and available personal allowances.
It means an individual will only be able to access the 0 per cent savings rate if their non-savings income is less than £16,000 (£11,000 personal allowance plus the £5,000 0 per cent band). Of course, an individual will only be able to access the full £5,000 0 per cent band if their non savings income is £11,000 or less.
If total income is greater than personal allowances, the lower 0 per cent savings rate will only apply to the savings income that falls within so much of the 0 per cent savings rate band that has not been “eaten into” by non-savings income.
The starting rate for savings is, self-evidently, a little more complex than the PSA. However, one suspects it will be less relevant than the PSA for many clients of financial advisers due to the income limits.
Next week I will continue my look at the draft clauses relevant for advisers, starting with the proposed changes to dividend taxation.
Tony Wickenden is joint managing director at Technical Connection