Changes to the way dividends are taxed from the 6th April 2016
In the Summer Budget Newsletter we outlined the dramatic new rules for taxing dividends that will apply from 6 April 2016.
As previously reported, there will be no 10% credit against the tax on dividends. Dividends above the £5,000 will be taxed at 7.5% if they fall into the basic rate of tax, 32.5% if they are at higher rates and 38.1% for dividend income falling into the additional tax rate. Currently dividends falling into the basic rate band are effectively tax free.
The £5,000 allowance needs to be taken into consideration in determining the rate of tax on your dividends. For example if you have salary and other non- dividend income of £40,000 next year and £9,000 in dividends, the £4,000 of taxable dividends are taxed at 32.5%, not £3,000 at 7.5% then £1,000 at 32.5%. This is because the £5,000 is added to the £40,000 income pushing the taxable dividends into the higher rate band.
If you own your own company it may be beneficial to bring forward dividend payments from next year to save the additional 7.5%. However, it would be important to consider all of the tax implications of such actions so come and talk to us to discuss your options.
These changes will affect investors, as well as director/shareholder companies, and it may mean that certain individuals will need to complete a self-assessment tax return due to dividend income. Investors should also speak to their Wealth Managers or Financial Advisors, to ensure that their income is still structured in the most tax efficient way.