On 8th July 2015 the Chancellor in his budget announced some fundamental changes to the way dividends are taxed for individuals.
The changes take effect from 6th April 2016 so now is a good time to refresh our memories on some of the salient points:
Currently – Dividend income is currently taxable as follows:
• Basic rate taxpayers – 10%, giving an effective rate of 0% after deducting the tax credit;
• Higher rate taxpayers – 32.5% (an effective rate of 25% on the net dividend received);
• Top rate taxpayers – 37.5% (an effective rate of 30.6% on the net dividend received).
Net dividends (the amount of cash actually received) are grossed up by the 10% tax credit to ascertain how much the individual shareholder should be taxed on, and a ‘Dividend Tax Credit’ is then claimed to offset this.
From 6th April – the Dividend Tax Credit will be replaced by a Dividend Allowance in the form of a 0% tax rate on the first £5,000 of dividend income per year. This allowance is in addition to the personal allowance. The tax rates after the Dividend Allowance will then be:
• Basic rate taxpayers – 7.5%
• Higher rate taxpayers – remains at 32.5%
• Top rate taxpayers -38.1%
Therefore, from April 2016 it is possible to receive up to £16,000 in salary and dividends from a company before any income tax will become payable. However, beyond this amount, the new rate of 7.5% will apply.
Any shareholder/director of a company will need to review their remuneration and extraction policies.
In addition, it may be worthwhile, where possible to bring forward the declaration of dividends during the current tax year whilst the current more tax efficient system is still in operation. Even if the physical cash is not taken by the end of the current tax year, once declared the dividend will provide the director/shareholder with a credit in the company accounts. The cash can then be drawn later with it still being taxed in the 2015/16 tax year.
