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Taxation of Dividends – New Dividend Allowance

The summer Budget included an announcement of proposed changes to dividend taxation, including the removal of the dividend tax credit for a new tax-free dividend allowance.

HMRC recently published a fact sheet outlining how the new tax-free dividend allowance will operate when it comes into force on 6 April 2016.

To summarise, with effect from 6 April 2016, dividends received up to £5,000 will be covered by the new dividend allowance and will be tax-free, however dividends exceeding this amount will be taxed at the follow rates:

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

It should be noted that the dividend allowance actually represents a ‘zero tax rate’ that applies to the first £5,000 of dividend income only, but such income is treated as marginal income which uses up the basic, higher and additional rate bands.

The Government suggests that ordinary investors with modest dividend income from company shares will see no change in their tax liability, and some will pay less tax. That said, a basic rate taxpayer with no other income can currently receive approximately £38,000 of dividend income tax free, whereas, from April 2016, the same individual will have a tax liability of £1,665.

From April 2016, higher-rate taxpayers will be better off as long as their dividend income does not exceed £21,667, but worse off if their dividends exceed this.

Furthermore, additional-rate taxpayers will be better off under the new regime providing their dividend income does not exceed £25,251, but worse off if their dividends exceed this level.

Planning for these changes in the current tax year should be considered, and it may be worth paying additional dividends in 2015/16, even if this accelerates the payment of income tax for higher and additional rate taxpayers. Additionally, any planning may need to consider the position of those with income over £100,000, who start to lose their personal allowance.

Needless to say, these new rules are likely to have a significant effect on individuals in receipt of dividends.   Saffron will be delighted to offer constructive advice to those concerned, so if you have any queries please get in touch with your usual contact, or via info@saffrontax.com.