Now that the dust has settled after what was a busy Summer 2015 Budget we can now look at the effects of the proposed changes in taxing dividends. Whilst there is still time for further change before the Finance Act is passed, the generally held view is that from April 2016 personal allowances of £11,000 and the dividend allowance of £5,000 will be available to set against dividends. An individual whose sole income consists of dividends won’t therefore commence paying tax until their income exceeded £16,000. However, this is sooner than in the current tax year with dividends effectively un-taxed until income exceeds c.£38,000.
With the introduction of a dividend ordinary rate of 7.5% (previously 10%), a dividend higher rate of 32.5% (unchanged) and a dividend additional rate of 38.1% (increased from 37.5%) we have considered some likely outcomes. It is clear from these that it is the removal of the 10% tax credit that has the biggest impact on individuals’ liabilities.
As with any changes in tax rate there are winners and losers. It is surprising though the levels by which different people are affected, depending on their other income and levels of dividend received. This is primarily due to the new dividend allowance, on which no tax is paid, being available to all, irrespective of other income levels.
Basic rate tax payers
Those who will feel the pinch most are company owners who take a small salary and extract profits through dividends. Assuming that the personal allowance is utilised against the salary and any other non-dividend income an individual will be up to £1,500 worse off with dividend income of £30,000. As dividend levels increase the impact could in fact be more.
These changes are likely to be the first step of many in levelling the playing field between the taxation of those trading through a company and those who are self-employed. The salary/dividend extraction combination from companies is still attractive financially for most individuals, but we may see changes to the dividend rate in future to combat that further.
Higher rate payers
Additional rate payers
The most surprising result of all is for those individuals whose dividends fall entirely in the additional (highest) rate tax band. They will be better off under the new tax rates until their dividend income exceeds £70,000!
What should you do?
Clearly there are many permutations dependent on individuals’ personal circumstances. Contact us to discuss your own circumstances, calculate the impact on you and explore the opportunity of planning your dividend timings ahead of the changes with a view to minimising that impact and keeping a smile on your face.