Understanding Dividends

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Understanding
dividends
it envisages the rules will apply on 17 August
2015. The examples in this article are based
on the details from the factsheet.
Changes at a glance
There are 4 main changes that will come into
effect from April 2016.
1. The 10% dividend tax credit will be
abolished.
2. Individuals will have a £5,000 a year
tax-free dividend tax allowance. This
allowance will not reduce total income
for tax purposes and will only apply to
dividend income.
3. Dividend income exceeding the annual
allowance will be taxed according to an
individual’s income tax band. Basic rate
taxpayers will pay 7.5%, higher rate 32.5%
and additional rate 38.1%.
4. No tax will be deducted at source; it will be
paid through self-assessment.
Dividends paid within pensions funds and those
received in shares from ISAs will stay tax-free.
The £1,000 savings allowance (£500 for
higher rate taxpayers) due to come into effect in
The chancellor George Osborne wasn’t
exaggerating when he said he was
undertaking a “major and long overdue
reform to simplify the taxation of dividends”
in his Summer Budget speech.
The current dividend system was set up
more than 40 years ago to avoid double
taxation of profits. At the time, corporation
tax was more than 50% which meant that
some individuals saw an 80% tax on their
dividends.
Today corporation tax is 20% (and due
to fall to 18% from April 2020) but the
taxation of dividends has remained
unchanged. This has provided
owner-managed businesses with financial
incentives to incorporate and extract
profits as dividends. Osborne said the
government cannot reduce corporation tax
further while there are “rapidly growing
opportunities for tax planning”.
So the “complex and archaic system” of
tax dividends will be overhauled in April
2016 with ‘a simplified structure and
different tax rates.
The final rules are still subject to legislation
but HMRC released a factsheet of how
ACTIVE PRACTICE UPDATES SEPTEMBER 2015
Tax UPDATE
A guide to how dividend taxation will change
from April 2016.
April 2016 excludes dividend income.
Who will be affected?
The government predicts that 85% of people will
pay the same or less tax under the new rules.
The other 15% are likely to be basic rate or non
taxpayers who receive dividends exceeding
£5,000 a year. This could be a business owner
who receives an annual salary below the
personal allowance and takes the rest of their
remuneration in dividends.
Investors would need a portfolio of more than
£140,000 with a 3.5% annual yield to exceed
the £5,000 annual allowance.
Current rules
Dividends are paid as though 10% tax has
already been deducted. This 10% is called a
dividend tax credit and is equal to a ninth of the
dividend. For example, a £90 dividend has a
£10 dividend tax credit attached to it.
For basic rate taxpayers, the 10% tax is deemed
sufficient and there is no more tax to pay.
Contact us about dividend tax.
Henwood House Henwood
Ashford TN24 8DH Kent
01233 630000