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Changes to the taxation of Dividends from April 2016

Source: | | 20/04/2016

We again write to alert you to the changes in the taxation of dividend payments to company shareholders from April 2016.

From April 2016, the NIC status of dividends has not changed. Unfortunately, the income tax position of dividend income has changed and this may have a direct impact on the overall savings in NIC and income tax that can be achieved.

We set out the impact of the dividend tax changes below.

Pre April 2016 position:
Up to 5 April 2016, if your company pays a dividend to its shareholders, as long as the person receiving the dividend is a standard rate tax payer no additional income tax would be due. Taking the 10% tax credit into account, higher rate and additional rate tax payers will pay an additional 22.5% and 27.5% respectively.

The changes proposed from April 2016:
From 6 April 2016, the way dividends are being taxed will change. The 10% tax credit is being abolished and each individual will have available a flat rate dividend allowance of £5,000. Any dividends received by an individual in excess of £5,000 will be taxed as follows:

  • 7.5% if your dividend income is within the standard rate (20%) band
  • 32.5% if your dividend income is within the higher rate (40%) band, and
  • 38.1% if your dividend income is within the additional rate (45%) band

Without the tax credit, a dividend income of £30,000 received in 2016-17 would create the following, additional income tax liabilities.

Comparison of tax payable on dividend income:

 Income tax due if dividend received is £30,000
2015-16
2016-17
Dividend is within the standard rate band
 Nil
£1,875
 Dividend is within the standard rate band
£7,500
£8,125
 Dividend is within the standard rate band
£9,167
£9,525

Based on these figures:

  • if your dividend income is within the standard rate band you would have extra tax to pay for 2016-17 of £1,875;
  • if your dividend income is within the higher rate band you would have extra tax to pay for 2016-17 of £625, and
  • if your dividend income is within the additional rate band you would have extra tax to pay for 2016-17 of £358.

Changes to the taxation of Dividends from April 2016

As you can see, this new tax on dividends will impact standard rate tax payers the most. In all cases any tax liabilities for 2016-17 will be collected 31 January 2018.

At the same time, HMRC will also add 50% of the tax liability to your first self assessment payment on account for 2017-18, also due 31 January 2018 with a further 50% due at the end of July 2018.

Unfortunately, in most, if not all cases this change in legislation will inevitably mean that you will pay more personal tax. If you would like us to explain the changes in more detail then please get in touch to book an appointment.



 

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