A change being made to the VAT Flat Rate Scheme on 1 April 2017 will force many businesses to leave the scheme.
The New Personal Savings Allowance
From 6 April 2016, a new Personal Savings Allowance (“PSA”) will be automatically given to every basic rate and higher rate taxpayer. Taxable savings income, such as interest received, that is covered by the new annual allowance will be tax free.
The PSA will be £1,000 per year for basic rate taxpayers and £500 per year for higher rate taxpayers. No PSA will be given to additional rate taxpayers.
The effect of this new allowance is to offer basic and higher rate taxpayers an income tax saving of up to £200 a year on their taxable savings income.
The introduction of the new allowance will have no impact on the treatment of savings income received from any tax efficient savings vehicles such as Individual Savings Accounts. It also does not cover the taxation of any dividend income received by taxpayers.
Deduction of Basic Rate Tax at Source
Since the introduction of the new PSA will make interest income tax free for many basic rate taxpayers, banks and building societies will no longer be required to deduct an amount equal to the basic rate of income tax (20%) from the interest payments they make to their savers from 6 April 2016.
An individual whose savings income was not previously taxable will not benefit from the new allowance.
However, the removal of the 20% tax deduction at source from bank and building society interest payments may provide a small administrative benefit to non-taxpayers; they will no longer need to request that their interest income be paid gross, or go through the process of reclaiming any tax suffered at source.
Impact: Basic Rate Taxpayers
Basic rate taxpayers will save up to £200 of income tax a year depending upon their level of taxable savings income. Where this income is in the form of interest received from banks or building societies, this tax saving will be realised through the removal of the 20% tax deduction at source.
Basic rate taxpayers with amounts of taxable interest income in excess of the £1,000 PSA should be aware that from 6 April 2016 their potential tax liability on the excess amount is no longer being covered by a 20% tax deduction at source.
HM Revenue and Customs (“HMRC”) have stated that they may be able to collect any unpaid tax on interest income automatically through the PAYE system by adjusting the taxpayers’ tax code. Whether this works in practice remains to be seen.
Basic rate taxpayers with annual interest income in excess of £1,000 should check at the end of each tax year that HMRC are aware of this, and that it has been correctly adjusted for through the PAYE tax codes system or declared via self-assessment.
Impact: Higher Rate Taxpayers
Higher rate taxpayers will also save up to £200 of income tax a year depending upon their level of taxable savings income.
Although less likely, those higher rate taxpayers not already required to report their taxable savings income to HMRC via self-assessment should ensure HMRC are aware of any interest income received in excess of their annual PSA.
Impact: Additional Rate Taxpayers
Since no PSA is available to additional rate taxpayers, there is no significant impact on additional rate taxpayers.
Interaction with The Starting Rate for Savings Income
As part of the government’s aim to simplify the UK tax system by making it more complicated, the new PSA will work alongside another little used tax saving measure called the Starting Rate for Savings Income.
The Starting Rate for Savings Income applies a tax rate of 0% to up to £5,000 of taxable savings income, provided the taxpayer has no taxable non-savings income. As the last sentence demonstrates, application of this starting rate is complicated and, in practice, little used since it only applies to very low earners or non-earners.
Where it would apply, a taxpayer who has no other taxable income could earn savings income of up to £17,500 tax free in the 2017/187 tax year since:
- The first £11,500 would be covered by their personal allowance,
- The next £5,000 would be taxed at the starting rate for savings income (0%), and
- The final £1,000 would be covered by their PSA and therefore also taxed at 0%.
Unfortunately, this £5,000 starting rate band for savings is only available where the taxpayer has no other non-savings income in excess of their personal allowance and is therefore rarely available to taxpayers in employment and/or receiving pension income.