Tax is sometimes taxing – an overview of the new dividend rules

On 8 July 2015 George Osborne delivered the first Budget of the new, Conservative, majority parliament and with this a huge change in how dividends are taxed. The move was quite unexpected and will have serious implications for large amounts of owner managed businesses.

For a long while, company owners and accountants have been used to a situation whereby shareholders were remunerated by way of a low salary and received the remainder of their income by way of a dividend. Although the dividend was not an allowable expense for corporation tax purposes, the low rates of income tax meant that people saved a lot of money and, therefore, it is now a common structure.

The government has countered this strategy by introducing legislation to tax dividends at a higher level from 6 April 2016. Although specific legislation hasn’t been released we can use reasonable estimates based on the government’s guidance. They have effectively increased the level of tax on dividends by 7.5% across the board. Therefore basic rate dividends have been increased from an effective rate of 0% to 7.5%; higher rate dividends from an effective rate of 25% to 32.5%; and additional rate dividends from 30.6% to 38.1%.

It isn’t quite as bad as it seems as there have been three introductions within the rules that slightly help the taxpayer. Firstly, the government has abolished the ‘notional tax credit’ on dividends. This was a tax credit that no one paid and no one received, however it counted towards your taxable income. Secondly, the government has introduced a £5,000 tax free dividend allowance. Thirdly the rate of corporation tax has been set to gradually reduce to 18% on 1 April 2020.

The next thing you need to consider is how this affects you; is there anything you can do now to mitigate the cost? Although not a huge amount, you should be speaking to an accountant to make sure that you fully understand the rules; it is important so that you are well informed about your business. Secondly, you should consider bringing some dividends forward so they are possibly taxed at 7.5% less. Lastly, even though it sounds daft … consider taking a lower amount of dividends; a lot of people take an arbitrary amount that is tax efficient, with careful planning it might be sensible to lower this.

Other points to consider:

  • If you were considering incorporation, this will need to be revisited for the impact on your annual tax saving and any possible sale of goodwill and amortisation
     
  • The impact on your private investments and any dividend stream you receive
     
  • The impact on any trusts
     
  • The legality of dividends and the importance of proper documentation.

In conclusion, the new dividend rules are going to negatively affect a lot of people, but the amount each person is affected may vary widely. You should speak to Armstrong Watson as soon as possible to make sure you are doing what you can to mitigate tax and to ensure you have a full grasp of the rules and their impact going forward.

Here is a link to our fact sheet which provides further details on the new rules.

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