Changes to the Taxation of Dividends – from April 2016

Directors and shareholders of companies should be aware of the changes to the taxation of dividends.  From April 2016, rules governing dividend distributions are changing – and they are significant.

The headlines are:

  • The current notional 10% tax credit on dividends will be abolished
  • A £5,000 free dividend allowance will be introduced
  • Above £5,000 dividends will be taxed at 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate)
  • Dividends received by pensions and ISAs will be unaffected
  • Any individual receiving £5,000+ dividends will need to complete a self-assessment tax return
  • Dividends will continue to be treated as the top band of income

For example, if you are a basic rate taxpayer and you receive all your taxable income in dividends, you will be up to £2025 worse off in 2016/17.  Directors of small companies who have been used to paying themselves a small salary and a larger dividend payment will be disadvantaged by these new rules.

It is important to note, however, that there is still a saving to be had from incorporating your business, rather than being a sole trader but the new rules will reduce this benefit.

Whether a director with a limited company or an individual with the potential to own shares, it is worth considering how you might make the most of the £5,000 dividend allowance.  In the light of the forthcoming changes, directors should consider how they might continue to extract profits from their company in the most tax-efficient way.