Emergency Budget
Taxation of Investments George Osborne’s emergency budget has created significant complications in the taxation of investments. In 2016-17 the personal allowance is £11,000. Following that, a further £5,000 of savings income (income from cash deposits and fixed interest investments) will be free of tax. Savings income, curiously, includes the profits from offshore bonds.
There is a new £1,000 personal savings allowance available for 2016-17. It will remove £1,000 of savings income from basic rate taxpayers and take away £500 from tax for higher rate taxpayers. Additional rate taxpayers will not get the allowance. The new £5,000 dividend income allowance will be given to all taxpayers from April 2016. Above £5,000 of dividend income basic rate taxpayers will pay 7.5% income tax for the first time, higher rate taxpayers will pay 32.5% income tax on their dividends and additional rate taxpayers will pay 38.1%.
Pooling all of these allowances together, the total amount of income the average individual will be able to receive, free of tax, (excluding what can be taken from ISAs and Bonds) will potentially be as follows for 2016-17:
Personal Allowance £11,000
Personal Savings Allowance £1,000
Savings Rate Limit £5,000
Dividend Allowance £5,000
Married couples and civil partners between them will be able to have up to a total of £44,000 tax-free income next year, if they manage to marshal all their financial ducks in a row. Having looked at your situation, it would necessitate an unbalanced portfolio in order to achieve this significant level. In particular, it would require a very large holding of cash or fixed interest securities to generate the £5,000 of savings income, assuming current rates of interest. Cash deposits would rob you of any prospects of capital appreciation and, therefore, capital erosion is the natural corollary. Fixed interest investments will inevitably secure capital losses as interest rates rise. The normal rule of thumb is that for every 1% rise in interest rates, fixed interest investments fall in capital values by 10%