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Help with tax on dividends

Tax Planning

April 2016 – changes to the taxation of dividends

From April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance. This means that help with taxation on dividends might be necessary for some people.

The Dividend Allowance means that you won’t have to pay tax on the first £5,000 of your dividend income, regardless of what non-dividend income you have. The new allowance is available to anyone who has dividend income.

This means that in the future, you’ll pay tax on any dividends you receive over £5,000 at the following rates:

  • 7.5% on dividend income within the basic rate band
  • 32.5% on dividend income within the higher rate band
  • 38.1% on dividend income within the additional rate band

This simpler system will mean that only those with significant dividend income will pay more tax. If you’re an investor with a modest income from shares, you’ll see either a tax cut or no change in the amount of tax you owe.

Generally, this means no change in tax for basic rate taxpayers with dividends below £5,000. Higher rate and additional rate taxpayers stand to gain though, as they will pay £1,250 and £1,530 less tax respectively on dividends up to the allowanceTrustees of discretionary trusts will be worse off. However, for many small business owners, who paid themselves largely in dividends, there could be an additional 7.5% to pay on a substantial portion of their income unless they alter the structure of their business. We would advise anyone affected to seek help with tax issues on dividends.

Without question, the new dividend taxation rules are simpler, but Investors who will be subject to the higher tax charge will need to plan carefully to avoid tax rises under the new rules. Doing nothing may not be the best course of action. Taxation of shares held in Pensions and Isa’s are unaffected.

The following tables give examples of the changes:

2015/2016 tax year

 

  Net dividend Tax credit Additional tax Dividends after all tax
Non-taxpayer £1,000 £111 £- £1,000
Basic rate taxpayer £1,000 £111 £- £1,000
Higher rate taxpayer £1,000 £111 £250 £750
Additional rate taxpayer £1,000 £111 £306 £694

*The additional tax payable is based on a nominal gross dividend, which is the net dividend plus the notional tax credit.

2016/2017 tax year

Every investor will have an annual tax-free dividend allowance of £5,000. The table below shows the amount of tax payable on dividends in excess of the dividend allowance.

  Net dividend Tax credit Additional tax Dividends after all tax
Non-taxpayer £1,000 £- £- £1,000
Basic rate taxpayer £1,000 £- £75 £925
Higher rate taxpayer £1,000 £- £325 £675
Additional rate taxpayer £1,000 £- £381 £619

Help with Tax

The Government website gives more information about taxation on dividends.

If you would like help with tax issues and to discuss your own personal situation, please contact us on 01454 521311 or use our contact form.

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