April 2016 brings big changes to dividend taxation – are you ready?

From April 2016 the way in which tax is applied to dividends will see substantial changes. Dividends, formerly the tax-friendly alternative to salary, will bring new tax liabilities – potentially leaving you with higher tax bills.

Under these new reforms, the Dividend Tax Credit will be abolished in April 2016 and a new Dividend Tax Allowance of £5,000 a year will be introduced in its place.

The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Unfortunately, in most, if not all cases this change in legislation will inevitably mean that you will pay more personal tax.

How will the changes affect you?

The following examples should help to put things into perspective, outlining how the dividend tax changes could affect you.

Example 1

“I receive less than £5,000 per year in dividends”

From April 2016 you won’t have to pay tax on your dividend income as it is within your new Dividend Allowance.

Example 2

“I receive dividends of £600 from shares invested in an ISA”

As is the case now, no tax is due on dividend income within an ISA, whatever rate of tax you pay.

Example 3

“I have a non-dividend income of £6,500 and a dividend income of £12,000 from shares outside of an ISA”

With a Personal Allowance of £11,000, £4,500 of the dividends are under the threshold for tax. A further £5,000 comes within the Dividend Allowance, leaving tax to pay at Basic Rate (7.5%) on £2,500.

Example 4

“I have a non-dividend income of £20,000, and receive dividends of £6,000 outside of an ISA”

You won’t need to pay tax on the first £5,000 of dividends due to the Dividend Allowance, but will pay tax on £1,000 of dividends at 7.5%.

Example 5

“I have a non-dividend income of £18,000 and receive dividends of £22,000 outside of an ISA”

Of the £18,000 non-dividend income:

  • £11,000 is covered by the Personal Allowance
  • the remaining £7,000 is taxed at Basic Rate

Of the £22,000 dividend income:

  • the Dividend Allowance covers the first £5,000
  •  the remaining £17,000 of dividends are taxed at the Basic Rate (7.5%)

At Salhan Accountants, we’re ready to help you.

If you would like us to explain the changes in more detail or look at any potential areas of planning for your company, particularly around the timing of dividends prior to the change coming into effect in April 2016, please contact us.

At Salhan Accountants, we can ensure you are as tax-efficient as possible before April arrives, and that you don’t pay the taxman any more than you need to in the interim.