The UK Government always talks about the need for simplification of the tax system but it rarely delivers on its promise.  Finance Bill 2016 is no different.  If we look at the fundamental changes to the way income is taxed which will take effect from 6 April 2016, they can be summarised as follows:

1. Simplification

The best news for many expatriates (including UK migrants resident in New Zealand) is that UK bank interest will no longer be taxed at source.  This will mean the end of tax repayment claims for non-UK residents who have UK savings and no other UK income.

2. Change

The biggest shock when the Chancellor delivered his Budget speech related to the taxation of dividend income.  For many years dividends were ‘grossed up’ and taxed at either 10% or 32.5% (or, more recently, at 38.1% for taxpayers paying your marginal rate of 45%).

The grossing up procedure was something which was difficult to understand and many clients questioned where the 10% tax credit (shown on the dividend voucher) went.  The truthful but unsatisfactory answer was that it didn’t go anywhere – it was simply a ‘notional tax credit’.  It meant that basic rate taxpayers had no further tax to pay on dividend income (because dividend income in the basic rate band was taxed at 10%).  Higher rate taxpayers had an effective rate of 25% of the net dividend – a dividend received of £90 was grossed up to £100, taxed at 32.5% to give a liability of £32.50 less the 10% tax credit given net liability of £22.50 [which was 25% of the £90 dividend received].

From 6 April 2016, there will no longer be any need to gross up the dividend – and £90 dividend will be taxed at 7.5% (for basic rate taxpayers), 32.5% (for higher rate taxpayers) or 38.1% (for additional rate taxpayers).  In some cases this means an increase in the tax liability because a basic rate taxpayer might now to pay £6.75 on a £90 dividend (whereas previously no tax would have been payable).  Similarly, on a £90 dividend:

• a higher rate taxpayer might now have to pay £29.25 rather than £22.50; and
• an additional rate taxpayer might now have to pay £34.29 rather than £27.50.

Before readers start to complain that this is simply a ‘tax grab’ it should be pointed out for many taxpayers the tax liability might also be reduced.  This is because there is a £5,000 nil rate band – in other words, the first £5,000 of dividends received will be taxed at 0% which will mean that many taxpayers with small share portfolios and reasonably small amounts of dividend income will not need to submit tax returns can only because of the dividend income received.

3. Complication

For many years UK bank interest has been subject to a 20% tax deduction at source.  The reason for this is that most basic rate taxpayers would then have no need to submit a self-assessment tax return.

This therefore begs the question – does the non-deduction of UK tax at source mean that all these taxpayers now need to submit tax returns to pay tax on their UK savings income?

Thankfully answer in most cases is ‘no’ and this is because for some taxpayers the first £5,000 of savings income is taxed at 0%.  This will primarily benefit pensioners whose total income consists of simply pension income and savings income.  Where their total income does not exceed the amount of personal allowance plus £5,000 then no tax will be payable.  This £5,000 of tax-free savings income is known as the ‘starting rate band’ but it should be emphasised that it is only available in 2016/17 to taxpayers whose total income is less than £16,000.  The starting rate band has existed for a number of years but was previously subject to tax at 10% but this was changed in 2015/16 when the tax rate was reduced to 0%.

It should be noted that the income is not ‘exempt’ (like income from an Individual Savings Account [ISA]) but taxed at 0%.  This might sound like a subtle difference but it means that the savings income must be included on a tax return where a tax return is required (unlike ISA income which does not need to be included on the return).

In addition to the starting rate band the Government have introduced from 6 April 2016 a ‘personal savings allowance’ (PSA) which will apply more generally to taxpayers with much higher incomes.  The PSA will be £1,000 for a basic rate taxpayer. £500 for a higher rate taxpayer and £0 for an additional rate taxpayer.

So therefore basic rate taxpayers with less than £1,000 of savings income will still not need to submit a tax return.  Furthermore, a higher rate taxpayer who is an employee (taxed under PAYE) and has no untaxed income apart from a small amount of savings income (< £500) should no longer be obliged to submit annual tax return.  This should help to extract many taxpayers from the annual self-assessment tax ‘merry-go-round’.

Summary

Whilst the New Zealand tax system can potentially be described as ‘raw’ due to its simplicity in certain areas such as tax rates, the UK system is quite the opposite.  If a client were to ask a simple question like ‘how much tax is payable on an additional £300 of income?’ even a basic answer would require consideration of the following points:

1. What type of income is it?
2. What is the level of other income for the tax year?
3. If it is savings income, has the savings rate band being fully used?
4. If it is savings income, has the PSA been fully used?
5. If it is dividend income, as the dividend allows been fully used?

By contrast, in New Zealand the only question to ask the question (2).

This article doesn’t even consider the interaction between the savings rate band, the PSA and the dividend nil rate band.  That can be left for another day!