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Author: JP / / Latest News

Summer Budget 2015 – Changes to Dividend Taxation from April 2016

If you receive dividends from investments or from your private company, you will pay more tax from April 2016 where total dividends are over £5,000.

Currently dividends carry a tax credit of 10%, so if you receive £900, the tax credit is £100 and the “gross” income for tax purposes is £1,000.

Dividends are treated as your “top slice” of income.

If they fall into your Basic Rate tax band there is no personal tax to pay on them.

If they fall into your Higher Rate band there is 32.5% tax payable on the gross amount, less the 10% tax credit. This equates to 25% of the actual dividend.

If they fall into Additional Rate Tax there is £37.5% tax payable on the gross amount, less the tax credit. This equates to 30.56% of the actual dividend.

i.e. dividend of £9,000, tax credit £1,000, gross dividend £10,000.

Higher Rate tax payer –

10,000 x 32.5% =        3,250

less: tax credit             (1,000)

Tax Due                      £2,250

which = 25% of           £9,000

Additional Rate taxpayer –

10000 x 37.5% –          3,750

less: tax credit             (1,000)

Tax Due                       £2,750

which is 30.56% of      £9,000

For any dividends paid from 6 April 2016, the tax credit will be abolished, so the actual dividend received will be the gross income.

There will be a £5,000 dividend tax allowance. There is no detail on this yet but we believe it means the first £5,000 of dividends received will suffer no personal tax.

Dividends will still be the “top slice” of income. The tax will be payable as follows –

Dividends falling in your Basic Rate tax band                                                            7.5%

Dividends falling in your Higher Rate tax band                                                          32.5%

Dividends falling into Additional Rate Tax                                                                  38.1%

Thus, with the exception of the first £5,000 of dividend income, your tax liability on dividends will be 7.5% greater than currently.

Particularly affected will be clients who currently have dividends within the Basic Rate tax band who will be currently paying virtually no tax. They will suddenly have a liability payable via their self assessment tax return and possibly payments on account towards the next tax year meaning large tax payments due in January 2018.

If you’re thinking whether you should stop paying dividends from your private company and take salary instead, it is generally still more tax efficient to take dividends.

Of course, this could all change if the government were to increase this “dividend tax rate” in future years which has been mooted.

 If possible and relevant to your circumstances, you may wish to consider taking extra dividends prior to 5 April 2016 to pay tax at the lower current year rates – this will however advance when the tax is payable.

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