Changes to dividend taxation from 6th April 2016

From 6th April 2016, the way in which dividends are to be taxed is changing.  These changes are aimed at the tax on small companies who pay a small salary and higher dividend to director shareholders.  It would appear that the government is wanting to close the gap on how a self-employed or salaried individual is taxed in comparison to a director / shareholder.

The changes: 

  • The notional 10% non-refundable tax credit on dividend will be abolished.
  • A £5,000 tax free dividend allowance will be introduced.
  • Dividends above this level will be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate).
  • Dividends received by pensions and ISAs will be unaffected.
  • Dividend income will be treated as the top band of income.
  • Individuals who are basic rate payers who receive dividends of more than £5,001 will need to complete self-assessment tax returns from 6 April 2016.

Impact

This measure will have a very harsh effect on those who work with spouses in family companies.  A couple could be over £5,000 p.a. worse off.

Key points:

If you are a basic rate taxpayer, and you receive all your taxable income in dividends you will be up to £2,025 worse off.

If you are a higher rate taxpayer, and you receive £50,000 of income in dividends in 2016/17 you will be worse off by £2,575

Next steps:

Whilst this is all very disappointing for director/shareholders, it is still more tax efficient to be remunerated by a low salary and higher dividend than being self-employed / fully salaried under PAYE.  There are also a few things to consider:

  1. For businesses that have distributable profit and loss reserves, it may be worth declaring an extra dividend prior to the changes in April, especially where there is surplus basic rate band available.  For higher rate tax payers, with surplus distributable reserves, for every £1,000 in extra dividend declared prior to the changes on 6th April 2016, £75 will be saved in tax.
  2. Can a share restructure be completed such that a spouse can benefit from their £5,000 allowance?

If you have any questions on this or would like to arrange a meeting to discuss the impact of these changes in more detail, please do not hesitate to contact us.

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