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.