Ten Biggest Changes To Personal Finances In 2016
Whether its new rules on pensions, savings or energy efficiency we set out what lays in store for you this year
You would be forgiven for thinking that 2015, which saw the introduction of both pensions freedom and much improved “super-Isas”, counted as a year of dramatic change in the world of personal finance.
But welcome to 2016: in this momentous year our state pension system will be overhauled, savings and dividends will be taxed under a new regime and millions of us will be given personal tax accounts operated wholly online and updated constantly.
And that’s just the start. Next (Other OTC: NXGPF - news) year will bring good news for some (less tax for many cash savers, for example) and bad news for others (high-earning pension savers and property investors will pay more tax). There will also be more changes to the Isa regime and the rules that govern how we pay for investments.
But don’t be daunted. The following list sets out the 10 most significant changes to our personal finance in 2016 and it covers everything you need to know.
=January 1 =
=Tax returns go digital =
New (KOSDAQ: 160550.KQ - news) digital “personal tax accounts” will be introduced in 2016 and will require some taxpayers to update their details four times a year.
The system has been “trialled” over the last few weeks of 2015, typically with wealthy taxpayers who have multiple income sources.
In 2016 a wider rollout gets under way, and it is expected that everyone who currently fills out a “self assessment” tax return will be using the digitised system by 2020.
Under the plans, everyone’s digital account will hold details captured from other sources including income from employment and interest earned on savings, which from next year will also be passed to HMRC by banks and building societies.
=January 1 =
=Savers’ deposit protection curtailed =
From January 1, the Financial Services Compensation Scheme will protect savings of £75,000 (or £150,000 held in a joint account) should the bank or building society go bust. The limit is falling from £85,000.
Those with savings over the new limit must split or move funds by December 31 to ensure that the full amount is protected.
Holders of fixed-term accounts have until this date to contact providers to make a penalty-free withdrawal of up to £10,000.
Savers should be aware of brands that share the same licence for example, HSBC and First Direct as the FSCS limit applies per licence. Only £75,000 will be protected across both brands.
=January 15 =
=Incentives for ‘green’ households are cut =
Payments to home owners who install “green” devices including solar panels, wind power and other energy-efficient installations will be slashed in the new year.
The Department of Energy & Climate Change is making far-reaching cuts and will reduce the “feed-in tariff”, the income paid to home owners with rooftop solar panels, wind and hydro generators.
From January 15, householders who complete these green installations will receive 67pc less in feed-in tariff payments than if they had completed installations before then.
From that date, solar panels will earn 4.39p for every unit of electricity generated and used in the home, compared with 13.39p before.
The 700,000 homes that already receive the feed-in tariff will be unaffected by the change.
=April (LSE: 0N69.L - news) 1 =
=Stamp duty rises for buyers of second properties =
Anyone who buys an additional residential property, including second homes and buy-to-lets, will have to pay an extra 3 percentage points in stamp duty from April 1 2016 .
The surcharge applies on top of the current stamp duty land tax rates. This means there will be 3pc tax (currently zero) to pay on homes worth up to £125,000, 5pc tax (instead of 2pc) on homes that cost between £125,001 and £250,000, and 8pc (currently 5pc) on homes worth between £250,001 and £925,000.
Homes worth up to £1.5m will be subject to 13pc stamp duty and those that cost more than this amount will incur a 15pc charge.
Scotland has followed suit and will introduce a surcharge at the same time.
This means that landlords such as Wendy and Andy Large, who own 20 properties and planned to build their portfolio into a full-time business, will be hit with thousands of pounds of added tax if and when they add to their investments.
This change applies on top of other increased taxes for buy-to-let investors, announced in the July 8 Summer Budget and applying from 2017.
=April 6 =
=Personal (LSE: PGH.L - news) savings allowance is introduced =
At present, savers pay tax on their interest earnings from current accounts, fixed-term bonds and other savings products, with the rate based on their income tax bracket.
From April 6, however, savers will receive a personal savings allowance.
This is set at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. This means they can earn that much in interest before tax is due.
It (Other OTC: ITGL - news) is estimated that the change will lead to 95pc of people no longer paying tax on their savings, with a pot of £50,000 earning 2pc required to hit the basic-rate threshold.
=April 6 =
=New dividend taxation regime begins =
April will see the start of a new system for taxing dividends from shares.
Under the rules now, a notional 10pc tax is applied to dividends, but is subject to a 10pc tax credit, which cancels it out.
The effect of this is that basic-rate taxpayers currently pay no tax, higher-rate payers pay 25pc and additional-rate taxpayers pay 30.6pc.
This complexity is being done away with. Instead, from April 6 everyone will be able to earn £5,000 of dividend income without paying any tax.
Dividend income in excess of that amount will be taxed at 0pc for non-taxpayers, 7.5pc for basic-rate payers, 32.5pc for higher-rate taxpayers and 38.1pc for additional-rate taxpayers.
=April 6 =
=New ‘single rate’ state pension becomes payable =
Those who reach state pension age after April 6 will fall into the new “single-tier” state pension system.
Supposedly easier and fairer, under this regime a single payment replaces the current set-up of a basic state pension plus a “second” state pension.
But the switch will be hugely confusing, and a significant proportion of those who retire in the early years of the new scheme will not get the full “single-tier” amount , which will begin at £155.65 a week.
=April 6 =
=New tax on top earners’ pensions =
While there is a strong possibility that wider cuts will be made to tax relief on pension contributions, what is certain is that high earners those with incomes of more than £150,000 will see their annual pension contribution limit fall from £40,000 to £10,000.
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And at the same time the lifetime pension allowance, which is the most you can amass in a pension before paying penal rates of tax of up to 55pc, falls from £1.25 to £1m. That lower limit caps a pension pot at a size where with today’s annuity rates it would furnish a 65-year-old with an annual pension starting at around £30,000.
=April 6 =
=Investing gets cheaper for some =
Commissions quietly deducted year after year from your Isas, pensions and other investments supposedly to pay for ongoing financial advice will finally be banned.
From April 6 investment middlemen, including financial advisers and brokers, will no longer be able to accept commission payments from fund companies.
The changes are the final phase of new rules that started to apply at the start of 2013 and stopped advisers from receiving ongoing, or “trail”, commission on new investments.
This rule has applied to brokers since April 2014. Since this date they have not been able to pocket commission on new businesses.
But until April 2016 commissions can still be deducted from old investments. It is this “back book” of investments that will soon become cheaper.
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=April 6 =
=The ‘Innovative finance’ Isa is launched =
There will be a brand new type of Isa for the 2016-17 tax year.
The “innovative finance” Isa will allow tax-free investment in peer-to-peer loans loans made by private individuals to borrowers arranged through an accredited online platform.
Established providers include Zopa , Ratesetter and Funding Circle but others are expected to follow.
The return you get depends on the level of defaults and the marketplace for loans, but people who lend on Zopa, for example, have been paid 4.8pc on their money this year, after all fees and bad debts.
Ben Hammond and his wife, Sophie, have 15pc of their savings in peer-to-peer loans. They began with Zopa but also invest through Landbay, which lends to landlords.
The Hammonds, who live in Hampshire, are among those who should benefit from the new Isa.
“I’d definitely wrap my loans in an Isa as I’m a higher-rate taxpayer,” said Mr Hammond, a property lawyer. He said the traditional “safe havens” for cash did not offer attractive enough rates and that peer-to-peer had become a “place where my money is safe but I also get a reliable return”.
Investments in peer-to-peer will count against your overall Isa allowance, currently £15,240.
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