Significant changes to the taxation of dividends come into effect from 6 April 2016

Significant changes to the taxation of dividends come into effect from 6 April 2016, which can be summarised as follows:

Dividends will no longer have a 10% tax credit attached to them

Currently, when you receive a dividend it is deemed to include a 10% credit, and the amount you receive is net of this tax. For example, a £9,000 dividend received is treated as a gross dividend of £10,000 with a tax credit of £1,000. As you are receiving the dividend net of tax you don’t have to physically pay this over, and only have extra tax to pay if the dividend income takes you into the higher rate bands for tax.

Everyone will have a dividend allowance of £5,000 per annum

This means you can receive £5,000 of dividend income with no tax to pay. This will include all dividend income, so if you held shares in listed companies which paid dividends then these would also be taken into account.

New tax rates for dividend income

Dividends within the basic rate band will be taxed at 7.5%, higher rate dividends at 32.5% and 38.6% if total income is over £150,000. This is an effective increase in tax of 7.5% on dividend income over £5,000. A typical remuneration strategy of salary to utilise personal allowance and basic rate dividends will in future lead to a typical tax liability of £2,025.

Whilst the changes to dividend taxation will erode some of the tax savings achievable by a low salary/dividend strategy, it is still generally advantageous to remain with this strategy rather than switch to a salary or bonus arrangement. If you only declare dividends to the basic rate band therefore you need to be aware of this increased tax liability.

If you usually declare higher rate dividends, now may be a good time to undertake a profit extraction planning review which would consider:

  • current remuneration strategy
  • effect of new dividend taxation on current strategy
  • consideration of whether or not to advance any dividends to potentially save on future tax
  • review of current share structure

Once the tax year has ended the new rules apply so you only have a small window of opportunity to consider these options.

A final point to note is that all shareholders will have a £5,000 dividend allowance from 2016/17, so it obviously makes sense to ensure this is utilised each year where reserves are available to do so.

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