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September 3, 2015
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Changes to Dividend Taxation from April 2016

From 6 April 2016, the 10% notional tax credit and associated grossing up on dividend income will be replaced by a £5,000 dividend tax allowance.

This will enable individuals to earn up to £5,000 in dividend income without paying any tax.

Any amount received above the £5,000 allowance will be taxed at 7.5% for basic-rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

While taxpayers with small investment portfolios will see no change in their tax liability, business owners who take out a small salary and pay themselves with dividends will be significantly affected by these changes.  See below for a comparative tax calculation.

The changes to the way dividends are taxed have been introduced to supress the volume of incorporations and to discourage remuneration though dividends rather than through wages to reduce tax liabilities.

Dividend Rates from 6 April 2016

The £5,000 allowance effectively uses up the basic/higher rate band, rather than increasing the total limits available.

Examples

1) In 2016/17 a business owner does not take a salary and pays themselves an annual dividend of £50,000.

New Rules

Dividend                                                                                    £50,000
Less: personal allowance                                                    (£11,000)
Taxable income                                                                      £39,000

Tax due:
£5,000 @ 0%                                                                                   £0
£27,000* @ 7.5%                                                                     £2,025
£7,000 @ 32.5%                                                                       £2,275
Tax payable                                                                              £4,300

* The basic rate band for 2016.17 is £32,000. The remainder of the basic rate band is calculated as £32,000- £5,000 = £27,000

Current Rules

Dividend + 10% tax credit                                                   £55,556
Less: personal allowance                                                    (£11,000)
Taxable income                                                                     £44,556

Tax due:
£32,000 @ 10%                                                                        £3,200
£12,556 @ 32.5%                                                                     £4,081
Tax liability                                                                               £7,281
Less: 10% tax credit                                                             (£4,456)
Tax payable                                                                              £2,825

Therefore under the new rules, the business owner's tax liability will be increased by £1,475 per annum.

2) In 2016/17 an investor receives a salary of £40,000 and dividends of £10,000.

New Rules

Salary                                                                                      £40,000
Dividend                                                                                 £10,000
Less: personal allowance                                                  (£11,000)
Taxable income                                                                     £39,000

Tax due:
Salary
£29,000 @ 20%                                                                       £5,800

Dividend
£5,000 @ 0%                                                                                 £0
£5,000 @ 32.5%                                                                       £1,625
Tax payable                                                                              £7,425

Current Rules

Salary                                                                                      £40,000
Dividend + 10% tax credit                                                      £11,111
Less: personal allowance                                                   (£11,000)
Taxable income                                                                   £39,000

Tax due:
Salary
£29,000 @ 20%                                                                   £5,800

Dividend
£3,000 @ 10%                                                                          £300
£8,111 @ 32.5%                                                                      £2,636
Tax liability                                                                             £8,736
Less: tax credit                                                                      (£1,111)
Tax payable                                                                            £7,625

Therefore under the new rules, the investor's tax liability will decrease by £200 per annum.

Contact us today to discuss your tax requirements.
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