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New Dividend Tax Rules

Dividend Rules


Many of our clients are limited company owners who pay themselves regular dividends as part of their remuneration package. This has long been seen as a tax efficient way to extract funds from the business, mainly because there is no national insurance to pay.

From 6th April 2016, there is a radical change in the rules, which in many cases will mean that company shareholders are going to be worse off.

What are the current rules?
Under the current rules, dividends are paid net of a notional 10% tax credit. The gross amount (i.e. the dividend actually received plus the tax credit) is added to the individual’s earnings when calculating their personal tax due. Dividend income is taxed at 10% for basic rate taxpayers, but because of the notional tax credit there is no tax due. The current tax payable on the amount of dividend actually received is:

• Basic rate taxpayer nil
• Higher rate taxpayer 25%
• Additional rate taxpayer 30.6%

The reason behind this was that dividends had already been taxed in the company at corporation tax of 20%, so it would be unfair to tax dividends further. But this is about to change …

What are the changes?
From the start of the 2015-16 tax year the dividend tax credit will be abolished, so dividends will no longer be grossed up. The first £5,000 of dividend income in the tax year will be tax-free for every individual. For dividends in excess of £5,000 taxpayers will be taxed on the amount actually received at the following rates:

• Basic rate taxpayer 7.5%
• Higher rate taxpayer 32.5%
• Additional rate taxpayer 38.1%

Who are the likely winners and losers?
If an individual has dividend income of less than £5,000 per year they may benefit because there will be no tax due. For basic rate taxpayer, however this is no change to the previous rules.
Many company owners will be penalised, because previously they paid no tax on dividends in the basic rate tax bracket. Now they will pay tax on any dividends over £5,000 in the year.
If a higher rate or additional rate taxpayer has high non-dividend earnings and a small dividend they may pay less tax than before.

What should company owners do now?
As the rules change on 6th April it is important to maximise any benefit from the old rules before that date. This may mean increasing dividends paid out prior to 6th April 2016.

What are we doing at Embarc?
We will be advising all our clients between now and the end of March on what is the best course of action. If anybody is concerned about the changes, they should get in touch with us now and we can calculate the likely impact of the new rules for them. We have also prepared a factsheet with some examples which is available on request.