Income Tax Computation 21st April 2016 2016/17 Personal Allowance: Utilise against dividend income? The start of the 2016/17 tax year saw the introduction of the personal savings allowance, which tax exempts up to £1,000 of savings income for basic rate tax payers and £500 for higher rate taxpayers (additional rate taxpayers do not receive an allowance). In addition, a new £5,000 zero rate dividend band was introduced, and the 10% dividend tax credit was abolished. A zero percent tax band for savings income of up to £5,000 may be available from 2015/16 onwards, but entitlement to this depends on the level of other income. These various changes mean that in future it will be necessary to consider how the personal allowance (£11,000 for 2016/17 unless adjusted net income exceeds £100,000) is allocated. Up to now the normal approach has been to offset the personal allowance against non-savings income first, savings income next and then divided income. However the legislation (s23 and s25 of ITA 2007) states that reliefs and allowances may be deducted “in the way which will result in the greatest reduction in the taxpayer’s liability to income tax”. The way the aforementioned rates and allowances interact may mean that it is not always beneficial to offset the personal allowance in the order ‘non-savings, savings, dividend’ as has been the case in the past. Whether tax software (HMRC or otherwise) will be able to cope with this is an entirely different matter!