Dividend Taxation Changes
Lisa Casey - March 7th, 2017
As announced in the Spring 2017 budget the Dividend Allowance will be reducing from £5000 to £2000 with effect from 6th April 2018. The treatment of the £2000 allowance will remain the same as detailed below. On the 18th April 2017 Theresa May called a General Election and so the changes announced above that were detailed in the Spring 2017 budget have now been dropped. For more information please see Impact of the General Election on 2017 Finance Bill proposals
What has changed
The way dividends are taxed changed with effect from 6th April 2016.
Under the old rules, dividends were grossed up by a 10% “notional tax credit” (net dividend divided by 9) to give the gross value upon which an individual was taxed. Dividend income falling within the basic rate band would not attract a tax liability. Gross dividends received in excess of this were taxed at 32.5% for higher rate taxpayers and 37.5% for additional rate taxpayers. This meant an effective rate of 25% for higher rate taxpayers and 30.6% for additional rate taxpayers on the net dividend.
The new rules mean that the taxable value of dividends is the actual amount paid/received i.e. they are not grossed up and there is no longer a 10% notional tax credit. Each individual is entitled to £5,000 of dividend receipts per tax year, taxed at a 0% tax rate, that is, effectively tax free. All individuals are entitled to this £5,000 allowance, regardless of the type or level of any other income they may receive in a tax year.
However, if dividend income exceeds £5,000, income tax will be charged at 7.5% for dividend income falling within the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band.
Dividends within your £5,000 allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on the dividends you receive in excess of the £5,000 allowance.
What the changes might mean for you
Investors with share portfolios yielding dividend income in excess of £5,000 per annum will find themselves liable to income tax, even though they may not have been in the past. As explained above, this could make a significant difference, especially where dividend income sits within the basic rate tax band.
Owner-managed companies may have previously decided to pay low salaries to directors, topped up to the basic rate tax band in dividends in order to minimise any potential tax liability. The new rules now mean that directors of these companies may need to re-think the way in which profits are extracted from their businesses, as setting low salaries and topping up with dividends may no longer be the most tax-efficient way of doing so (taking account of the effects of National Insurance and Corporation Tax also).
How we can help
There are ways in which individuals’ £5,000 dividend allowance can be utilised through tax planning amongst families for both investors and owner-managed companies. Please do get in touch if this is something you would like us to assist you with. We can also help with advice on remuneration strategies for your owner-managed business in order to minimise the overall tax liabilities.