One of the major announcements in the Summer Budget, affecting owner managed businesses was the proposed changes to dividend taxation. Very little was announced on Budget Day but the Government have now published a factsheet providing further details on the Dividend Allowance which also provides examples of how the new tax allowance will work when it comes into force on April 2016.
From April 2016 the dividend tax credit will be abolished and a new dividend tax allowance of £5,000 a year will be introduced. Dividends received up to £5,000 will be covered by the new Dividend Allowance and will be tax free, but dividends exceeding this amount will be taxed at the following rates:
- 7.5% on dividend income within the basic rate
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band
The Dividend Allowance factsheet gives 6 useful examples demonstrating how individuals could be affected. Click here for a copy of HMRC’s Dividend Allowance Factsheet
Although the Governments headlines say “this simpler system will mean only those with significant dividend income will pay more tax”, we believe that in most cases where business owners extract profit by way of dividends, the new rules will lead to an increase in their tax liability.
With a split of income of £8,000 (to trigger basic national insurance) and £40,000 dividends received you will be £1,450 worse off in 2015/16. A salary of £8,000 with £50,000 dividends will result in £2,200 additional tax.
Recipients of dividends who were previously did not have a tax liability will now have to pay tax if they are in receipt of dividends in excess of £5,000 and they will need to register with HMRC and complete a self assessment tax return to report this.
It is important therefore to plan for these changes in the current tax year. It may be worth paying additional dividends in 2015/16, assuming there are sufficient distributable reserves, even if this accelerates the payment of income tax for those liable at the higher or additional rate of tax.
Call Liric now to find out how the new rules will affect you – 01763 853633.