Posted March 11, 2016

Taxation of Dividends

In the summer Budget, the chancellor George Osborne announced major changes to the current tax legislation which applies to dividend income.

From 6 April 2016 there are 4 main changes coming into effect:

The 10% dividend tax credit will be abolished.

• Individuals will have a £5,000 a year tax-free dividend tax allowance. This allowance will not reduce total income for tax purposes and will only apply to dividend income.
• Dividend income exceeding the annual allowance will be taxed according to an individual’s income tax band. Basic rate taxpayers will pay 7.5%, higher rate 32.5% and additional rate 38.1%.
• No tax will be deducted at source; it will be paid through self-assessment.

Dividends paid within pension funds and those received from shares in ISAs will stay tax-free.

The £1,000 savings allowance for interest income (£500 for higher rate taxpayers) due to come into effect in April 2016 excludes dividend income.

In addition to the increased rate of tax on dividends, the employment allowance will no longer be available to director only companies from 5 April 2016.

Tax Review

 Small business owners may therefore find it advantages to review the level of dividends they withdraw before 5 April 2016 along with the split of wages/dividends for the 2016/17 tax year.

If this is something you would like to consider, we can help you review your 2015/16 position in conjunction with your future dividend withdrawal plans, please contact us for further information.

The information contained above is provided for information purposes only and is not intended to amount to advice on which reliance should be placed. We therefore disclaim all liability and responsibility arising from any reliance placed on such information. Professional advice should be obtained before taking or refraining from taking any action as a result of the above contents.