Dividends – Changes to Taxation April 2016

Changes to Dividend Taxation

Important from 6 April 2016 there will be changes in the way Dividends are taxed.

The Dividend Tax Credit (one ninth of the dividend value), will be removed.

This will be replaced by a new Dividend Allowance in the form of a 0% tax rate on the first £5,000 of dividend income per year.

UK residents will pay tax on any dividends received over the £5,000 allowance at the following rates:

  • 7.5% on dividend income within the basic rate band
  • 32.5% on dividend income within the higher rate band
  • 38.1% on dividend income within the additional rate band

The policy objective is to address the incentive for some people to set up a company and make payments as dividends rather than as salary (attracting national insurance contributions).

From 6 April 2016,  the basic individual income tax allowance will be increased to £11,000.  The basic rate band will be increased from £31,785 to £32,000.  Income in excess of this will be taxed at either 40% or at the additional rate of 45%.

[Dividend income will count towards an individual’s basic or higher rate limits].

If therefore,  you pay yourself predominantly in Dividends,  you are advised to prepare calculations as to whether it would be advantageous for you to explore whether you should maximise your dividend in this tax year,  before 5 April 2016.  If you are a director of a small company,  you need to review the way you are paid and the method by which you take drawings from your company.

The effect of these changes will also impact on those who rely on the payment of dividends for income,  particularly in retirement.  If this is the case,  your investments need to be reviewed as a matter of urgency as there are ways in which an income can be generated and not fall foul of the new rules.

If you would like to discuss this further,  please do not hesitate to contact me.