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Changes to dividends for individuals

Next in our series of articles on the announcements made in the summer budget is the Government’s change to taxation of dividends.

The existing tax credit on dividends was introduced over 40 years ago, at a time when the Corporation Tax rate was in excess of 50%, but this rate has reduced substantially over the years so the Government is proposing changes to the way dividends are taxed and bringing the regime into line with the current taxation climate.

Further Corporation Tax cuts are planned with the rate reducing to 19% in 2017 and 18% in 2020, but the Government has also emphasised that it wishes to simplify tax rates for individuals.

From April 2016, the dividend tax credit will be removed and replaced with a new tax-free dividend allowance of £5,000 per annum, which will be applicable to all tax payers. The Government does not expect ‘ordinary investors’ or those with modest dividend income to see any change in their tax liability, but this shouldn’t be taken for granted. We suggest that those who are used to receiving dividend income within their investment portfolio should undertake a review to ensure that they don’t unwittingly creep into a higher tax bracket.

This new arrangement is accompanied by the introduction of the new personal savings allowance, also due to take effect from 6 April next year, which aims to remove tax on a basic rate tax payer’s savings of up to £1,000. A higher rate tax payer will only receive an allowance of £500 and additional rate tax payers will receive nothing.

The automatic deduction of tax on non ISA savings previously taken at source by banks and building societies will also cease at the same time. The annual ISA contribution limit remains at £15,240.

Taking these new allowances into account along with an increase to the Personal Allowance means that from April next year an individual could receive up to £17,000 of income completely free of tax.

Those who generate the bulk of their income from dividends from their business may well be affected by these changes so we recommend that advice is sought to assess the potential effects of the dividend allowance changes.

To read Armstrong Watson’s commentary on the changes to dividends click here.

If you have any concerns about the changes to dividends please contact one of our 15 office locations on 0808 144 5575. As Accountants, Business and Financial Advisers we have Tax Consultants and Financial Planners all under one roof. Alternatively email: help@armstrongwatson.co.uk.

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