shaw gibbs - accountants and business advisers
accountants & business advisers
Book your Free Meeting here

Have a question? Like to know more? - Contact us or Call 01865 292200 or 020 7436 4773, Mon-Fri 8:15am - 5:15pm

To latest news
news article default image

All change for dividends

8 Dec 2015

3 minute read

The rules on the taxation of dividends are set to change substantially from 6 April 2016, which could have a significant impact on the amount of tax you pay. Here we outline the facts and figures which will form the basis of the reforms. 

Under existing legislation, the taxation of dividends is made complicated due to a 10% tax credit being added to the cash amount of the dividend, with the tax credit then satisfying all or part of the income tax liability on the dividend. The practical effect of the system is that basic rate taxpayers have no further tax to pay on dividend income and a higher rate taxpayer will pay an effective 25% on the cash amount of the dividend receipt. However, this is soon to change: from 6 April 2016 this tax credit will cease, and all dividend income will be taxed as gross.

For the 2016/17 tax year the first £5,000 of dividend income will be taxed at 0%. Your subsequent rate of tax will be dependent upon any other taxable income you have. If your dividend income moves you from one tax band to another, then you will pay the higher dividend rate on that amount.

The old and new regime: a comparison

Depending on your overall income and dividends that you expect to receive, this change may have a greater or lesser impact on your finances. The following table shows a comparison between the current and prospective tax rates:

Basic rate band

Higher rate band

Additional rate band

 Effective dividend tax rate now

0%

25%

30.6%

 Rate from 6 April 2016

7.5%

32.5%

38.1%

Case Study

Andy has non-dividend income of £6,500 and a dividend income of £12,000 outside of an ISA. In the current tax year, Andy will have no tax to pay on his dividend – some of the dividend falls into the basic rate band but the effective tax rate is nil.

In the next tax year, Andy’s personal income tax allowance of £11,000 covers his non-dividend income plus £4,500 of his dividends. With the £5,000 dividend allowance, he will pay tax on £2,500, which is 7.5% as a basic rate taxpayer.

Minimising the tax impact

Be sure to make the most of your tax-efficient savings and pension options. Married couples could consider spreading their investment portfolios in order to maximise the dividend tax allowance, and also make use of their personal income tax allowances. Some of the other key points to consider include:

Trading as a limited company – if you are currently trading as a limited company, you will still benefit in tax terms. However, the tax saved by incorporation has been reduced.

Salary or dividend? – a director-shareholder is still likely to benefit from taking a dividend over a salary, although the amount of tax saved will be reduced.

Taking dividends before April 2016 – it may be worth increasing dividends before 6 April 2016. However, there may be other tax issues to consider, such as loss of the personal tax allowance if your total ‘adjusted net income’ exceeds £100,000.

Please note that this article is based on our current understanding of the new regime, with detailed legislation expected to be released in due course. Early planning can help save you money in the future, so please contact us for advice tailored to your particular circumstances.

news article default image

For more info contact us:

01865 292200

© 2017 Shaw Gibbs Ltd

Your registration