Important considerations for business owners and those with investment portfolios

In light of the changes to the tax rules on dividends coming into effect from April 2016, it’s not just the remuneration that directors take from their companies that counts as Sharon Ryan and Steven Holmes have already highlighted. If you’re an investor with a portfolio of shares (or other dividend paying investments), any dividends you receive may also be taxed going forward.

Under current rules dividends receive a 10% tax credit, so if you’re a basic rate tax payer there is no further Income Tax liability, but Higher rate and Additional rate tax payers have further tax to pay.

The new rules mean that the 10% dividend tax credit will be abolished from April and be replaced with a £5,000 tax free allowance for all individuals. The new headline tax rates will be applied on the dividends received above this level.

It’s worth noting that any dividends received from shares invested within an ISA or pension arrangement will incur no tax charge, but dividend income from investments held outside of these will be taken into account under the new rules.

In the example below, our typical business owner has already taken £5,000 in dividends from their business and receives a further £5,000 from their personal share portfolio (held outside of an ISA/Pension). From April 2016 the extra tax due on these dividends would be as follows:

  2015/16 2016/17
Basic rate £0 £375
Higher rate £1,250 £1,625
Additional rate £1,530 £1,905

Utilising your full ISA allowance is probably the simplest way to shelter your investments, but it is important to remember that the current ISA allowance is £15,240, so those with more substantial investments should have a discussion with a financial adviser to review their financial arrangements and maximise the available tax breaks/exemptions.

Armstrong Watson Financial Planning is an independent financial adviser and has Financial Planning Consultants across our 15 office locations. We can work alongside your tax adviser to ensure that your investments work in tandem with your personal or business strategies. Contact us to discuss your requirements and organise a review.

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