In the Summer 2015 Budget the Chancellor announced big dividend changes with effect from 6 April 2016.
Following the announcement last year we answered some key questions:
- How will the new tax work?
- What does the new dividend tax come into force?
- Will the new dividend rules impact personal allowance?
- Will everyone be worse off under the new regime?
- How does this affect remuneration and profit extraction planning?
- What should those affected do now?
Clarification of new 2016 dividend rules now given
Draft legislation has now been published setting out how the new rates of income tax on dividends and the new Dividend Allowance which will apply to dividends received on or after 6 April 2016. This confirms our understanding of how the new regime will operate (in the article linked above) following the initial announcement in July last year.
It is now confirmed that the rates of income tax on dividends for 2016/17 will be:
There will also be a new Dividend Allowance of £5,000 where the tax rate will be 0% – the dividend nil rate. The Dividend Allowance applies to the first £5,000 of an individual’s taxable dividend income and is in addition to the personal allowance.
Where an individual receives dividend income, from UK or non-UK resident companies, that would otherwise be chargeable at the dividend basic, higher or additional rate, and the income is less than or equal to £5,000, the dividend nil rate will apply to all of the dividend income. Where the dividend income is above £5,000, the lowest part of the dividend income will be chargeable at 0%, and anything received above £5,000 is taxed at the rate that would apply to that amount if the dividend nil rate did not exist.
In calculating the tax band into which any dividend income over the £5,000 allowance falls, savings and dividend income are treated as the highest part of an individual’s income. Where an individual has both savings and dividend income, the dividend income is treated as the top slice.
The following example illustrates how the new Dividend Allowance and rates will work:
Patricia has a salary of £40,500 and dividend income of £7,000 in 2016/17. Her total income is therefore £47,500. The total of her personal allowance and basic-rate band comes to £43,000. Therefore part of her dividend income would be taxed at the higher rate were it not for the operation of the new dividend nil rate.
So £5,000 of her dividends will be taxed at 0% and £2,000 will be taxed at the higher rate of 32.5%.
Challenges and opportunities
As the new tax rules bring challenges to many, they also bring tax planning opportunities and it is crucial you carefully consider your options in regards to ISAs, pensions, VCTs and how you structure your overall income. You can read more on the big dividend changes and what they may mean for you here.
It is also worth considering the share structure of your company as it may be possible to increase tax efficiency.
More from our tax experts
You can find all of our latest tax articles and tax resources here.
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