Major Overhaul of Dividend Tax 2016

The 2016/17 tax year will see a major overhaul of the taxation of dividends.  The changes are aimed primarily at small businesses where Directors are usually remunerated by small salaries with dividends to minimise tax and National Insurance liabilities.  The changes will, however, impact all investors with shares and investment funds held outside ISAs.

 

The changes may be summarised as follows:

 

• The notional 10% tax credit on dividends will be abolished.

• A £5,000 tax‐free dividend allowance will be introduced.

• Dividends in excess of £5,000 will be taxable at 7.5% for basic rate tax payers, 32.5% for higher rate tax payers and 38.1% for additional rate tax payers.

• Dividends received by pension funds and ISAs will not be affected.

• Dividend income will be treated as the top band of income.

• Any individual who receives dividends of more than £5,000 will be required to complete a tax return.

 

The tax effects of these changes are:

 

• Basic rate tax payers with dividends of up to £5,000 will see no change at all – see Example 1.

• Basic rate tax payers with dividends of more than £5,000 will see an increase in tax (7.5% of dividends above £5,000 up to the higher rate threshold of £43,000) – see Example 2.

• Higher rate tax payers with dividends of up to £5,000 will benefit from savings of up to £1,250 per annum – see Example 3.

• Higher rate tax payers (with taxable non‐dividend income of more than £43,000) will see their tax bill reduce on dividends up to £21,667 per annum – see Example 4.

• The biggest “losers” will be those with low levels of taxable non‐dividend income and dividends of more than £5,000 – see Example 5.

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