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What do the Changes to Dividend Tax Rules announced in the Summer 2015 Budget mean?

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What do the Changes to Dividend Tax Rules announced in the Summer 2015 Budget mean?

One of the key announcements in this week’s Budget was the introduction of new dividend taxation rules, which will come into effect in April 2016. The changes are expected to generate around £6.8bn of tax over the next five years.

It is common practice for shareholder directors to take their remuneration from their companies via a mix of salary and dividends. At the moment under the current regulations all UK dividends are paid with a notional 10% tax credit which assumes basic rate tax has already been paid. This enables shareholders to receive annual dividend income of up to £32,000 effectively tax free.

Under the new system the 10% tax credit is going to be withdrawn meaning all dividend income will be treated as untaxed gross. From April 2016 all tax paying shareholders will be entitled to an annual tax free dividend income allowance of £5,000. Any dividend income in excess of the £5,000 allowance will be subject to tax dependent on any other taxable income. The new rates of tax on dividend income will be:

  • 7.5% for basic rate tax payers
  • 32.5% for higher rate tax payers
  • 38.1% for additional rate tax payers

If dividend income moves an individual from one band to the next they will have to pay the higher dividend rate on that portion of their income.

There will still be an advantage in taking a mix of salary and dividends as National Insurance must be paid on salary. “Take home pay” will be reduced where dividend income exceeds the £5,000 allowance, which for basic rate tax payers will amount to £75 tax per £1,000 of dividend income.

If you would like to discuss how these changes might affect you please contact your local office.