The start of a new tax year is a very good time to review your financial plans to ensure that you are making the most of and protecting yourself against the latest changes.

This year is no exception with changes to the taxation of dividend and savings income, the Annual Allowance and Lifetime Allowances for pensions all coming into effect.

We will focus here on the changes to dividends and savings income and the advantages that come from using your ISA allowance each year.

From tax year 2016/17, depending on whether you are a Basic or Higher rate taxpayer, the first £1,000 or £500 of your savings income will be tax-free under the new personal savings allowance.  Additional rate taxpayers do not benefit from this and will pay tax on their savings income as normal.

For the purposes of the personal savings allowance, savings income consists of:

• bank and building society interest
• interest distributions from unit trusts and other collective funds
• income from gilts and corporate bonds
• most forms of purchased life annuities

What does this mean?

The change means that savings income from these sources will be paid with no tax deducted at source.  HMRC will typically recover the tax due via your tax coding but in some cases the changes could mean that someone who currently does need to do a tax return will be required to do one if their savings income exceeds their new personal savings allowance.

Holding these funds in a cash or investment ISA instead will mean that the income is entirely tax-free and does not count towards the personal savings allowance or even need to be declared to HMRC.
In a similar vein, the first £5,000 of dividend income will be tax-free.  Dividend income in excess of this level will be taxed at 7.5%, 32.5% or 38.1% depending on whether you are a basic, higher or additional rate taxpayer.

As with savings income, investments yielding dividends such as shares or units in a collective fund can be held in an ISA in order to convert the income into a tax-free source.
Bed and ISA rules allow investments not already in an ISA to be sold and bought back within an ISA to ensure that future income and gains are tax-free.  The transaction will potentially incur dealing and other costs and is treated as a disposal for capital gains tax purposes so it is important to ensure that the benefits of making the changes outweighs the costs but this can be a good way of using your ISA allowance where you do not have new funds to invest.

Other reasons to use your ISA allowance each year are:

• to protect future income and gains from tax, for example when interest rates eventually rise.
• ISA allowances can now pass between spouses and civil partners on death. This means that the survivor can continue to benefit from tax-free returns on the portfolio built up by their deceased husband, wife or partner.
• It is now possible to switch freely between cash and investment ISAs making it easier to manage the risk taken with your funds and to take advantage of changing market conditions and returns in the future.
• It is now possible to withdraw funds invested earlier in the tax year and replace them within the same tax year without it affecting your ISA allowance for the year.

ISAs are now an established and popular savings vehicle and with the introduction of the Lifetime ISA in 2017 they look set to become more deeply embedded in the UK savings landscape.  It is therefore well worth ensuring that you are making the most of the opportunities that they provide in conjunction with the new savings and dividends allowances.

For more information on ISAs or any of the areas mentioned above please contact your normal Johnston Carmichael Wealth financial planner or contact Scott Newman, Chartered Financial Planner on 01463 796200 or by emailenquiries@jcwealth.co.uk.

Disclaimer: The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.

While all possible care is taken in the completion of this article, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained herein can be accepted by this firm.