The New Dividend Tax – All Change

George Osborne’s Summer Budget on 8 July 2015 threw up many surprise announcements, but none quite as surprising as the complete overhaul of the dividend tax regime.  This will affect a large number of business owners.

Currently, basic rate taxpayers suffer no tax on dividend income, while higher rate taxpayers are required to pay 25% and additional rate taxpayers 30.56% of the dividends they receive. The tax rates applied to dividends have always been relatively generous when compared with other sources of income such as salaries and bank interest, due to the fact the company paying the dividends has already been taxed on their profits from which the dividends are paid.

A lot of owner managers of small companies (who typically remunerate themselves by taking a small salary with the balance as dividends in order to utilise their basic rate band) will lose out. Under the current regime this remuneration strategy would typically result in no additional tax being due by the owner manager, however the changes announced in the budget have significantly altered the results of such remuneration strategies.

Under the reform announced in the Budget, from 6 April 2016, individuals will now have a stand-alone £5,000 dividend tax allowance each year. This is over and above their regular personal tax allowance which for the tax year commencing 6 April 2016 is £11,000. When the dividend income received by an individual during a tax year is below £5,000, no additional tax will be due, regardless of whether the individual is a basic rate, higher rate or additional rate taxpayer.

Where dividend income exceeds the £5,000 dividend tax allowance, the excess will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. All individuals with a liability arising as a result of their dividend income will be required to register with HM Revenue and Customs and will need to complete an annual tax return if they do not already do so.

The effects of the above changes are expected to be felt by many.

Trading as a limited company is still attractive as it gives individuals commercial protection, and this alone, should not be underestimated, although we would urge business owners to quantify the additional tax promptly and plan accordingly.

If you need more information on anything covered in this article – or would like to discuss your personal situation in more detail, please contact one of our tax team at your local office or email action@wrightvigar.co.uk – we would be delighted to have an opportunity to help you.