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Big changes afoot for dividend tax from April

Tuesday, March 8th, 2016

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Many of those seeking out our personal and business taxation expertise are likely to be especially interested in finding out how they will be affected by the major changes set to take effect from 6 April 2016 to how dividends will be taxed.

What changes are taking place?

The aforementioned date will see the abolition of notional 10% tax credit on dividends, alongside the introduction of a £5,000 tax-free dividend allowance. Dividends that exceed this level will be taxed at 7.5% for basic rate taxpayers, 32.5% at the higher rate and 38.1% at the additional rate.

The changes will see dividend income treated as the top band of income, with individuals paying the basic rate who receive dividends exceeding £5,001 expected to complete self-assessment returns from 6 April 2016. Dividends received from pensions and ISAs will not be affected.

What impact will these changes make?

The new rules surrounding dividends are intended to tackle the issue of small companies paying a small salary designed to preserve State Pension entitlement, while paying a much larger dividend in order to reduce National Insurance (NI) payments.

Those working with spouses in family companies will be especially adversely impacted by the changes, with a couple being potentially £5,000 worse off a year.

What HMRC’s examples tell us

HMRC has provided examples of the effects of the new dividend tax rules, assuming for 2016/17 an £11,000 personal allowance (PA), along with a basic rate (BR) threshold of £32,000 and a higher rate (HR) threshold of £43,000.

Those who have an annual dividend income – dividends held outside an ISA – of £5,000 or less will not have to pay tax on their dividends, even if they are a higher rate taxpayer, due to their dividends being covered by the £5,000 dividend allowance.

Meanwhile, those with a total income of less than £11,000 will have their income covered by their personal allowance, with their dividend allowance being effectively unused. Nor will those receiving their dividend income through shares in an ISA need to worry about the payment of any tax, with this income remaining unaffected by the dividend allowance.

Building on HMRC’s examples

Various other examples have been outlined by HMRC, revealing that those with a non-dividend income of £6,500 and a dividend income of £12,000, for example, will end up paying £187.50 more a year in tax as a result of the changes.

We also learned that someone with a non-dividend income of £20,000 and a dividend income of £6,000 will have an additional £75 more a year to pay in tax, and that a person with £18,000 in non-dividend income and £22,000 in dividend income would have £1,275 more to pay in tax.

If, however, you have a £40,000 non-dividend income along with a dividend income of £9,000, your tax bill will only increase by £50, to a total of £1,300.

To learn more about the impact that the dividend tax changes will have when they take effect on 6 April 2016, read HMRC’s highly informative Dividend Allowance factsheet, and if you require more tailored guidance on how they are set to affect you, get in touch today with Accounting People’s well-qualified and knowledgeable tax specialists.

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