New tax year brings dark clouds for some savers as pensions allowances slashed and dividend tax credits abolished

 
Hayley Kirton
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Good morning! Ready to calculate your new rate of income from interest, dividends and pensions? (Source: Getty)

Oh what a beautiful morning? Perhaps not if you're a saver, as this group will wake up tomorrow to less generous treatment for a major type of investment and a substantial shakeup for another.

From tomorrow, those saving up for a comfortable retirement will see the amount they can add to their pension pot tax-free cut, as the lifetime allowance drops from £1.25m to £1m.

Meanwhile, those with a total taxable income over £150,000 will also have the maximum they can top up their pension pot with each year slashed, as a taper to the annual allowances, which could bring the limit down to as low as £10,000 for the highest earners, will apply from tomorrow.

Those who have banked on dividends to keep them going may find they need to grab a calculator to figure out if they are better or worse off. The 10 per cent tax credit applicable to dividend income has been scrapped for the 2016/17 tax year, although a dividend tax-free allowance of £5,000 will be introduced instead.

Read more: July Budget measures boosted people's incentive to work

If those dividend changes weren't enough, the tax rate applicable to dividends above the £5,000 level is changing to 7.5 per cent for basic rate taxpayers and 38.1 per cent for additional rate taxpayers. To make matters more confusing, the tax rate for higher rate taxpayers will be staying put at 32.5 per cent.

However, it's not all bad news for those watching the pennies, as the new tax year also brings with it the introduction of the personal savings allowance (PSA). The PSA enables basic rate taxpayers to earn up to £1,000 in interest tax free, and higher rate taxpayers up to £500.

The situation is no more straight-forward for state pension income, as 6 April 2016 marks the beginning of the new state pension, otherwise known as the flat rate pension or the single tier pension.

Read more: High earners hard hit by pensions muddle

A report released today by The Institute for Fiscal Studies has warned that, while the aim to replace the complex state pension system of old with a simpler and easier-to-understand version, there would still be years of confusion to come while pensioners transitioned between schemes.

"Given the rhetoric around the policy, it might come as a nasty surprise to many that their state pension income is in fact less than the full 'flat rate' amount of £155.65 per week," the researchers, Rowena Crawford and Gemma Tetlow, added. "It would be a shame if such disillusion was to threaten the sustainability of what is on balance a sensible reform."

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