Tax On Dividends Beginning April 2016
The topic on the tip of everyone’s tongue at the moment has been the Chancellor’s proposed new tax on company dividends.
Just a reminder, the Finance Bill 2016 will extinguish the 10% tax credit on dividend income, this will cease to be grossed up in personal tax computations from 6th April 2016. Instead the chancellor has proposed a £5000 dividend tax allowance to replace it.
Until now, there have been no details released to tell us about how the allowance will fit within the structure of personal allowances and tax rates. The ICAEW Tax Faculty has been working with the treasury to produce guidance, this was released on 17th August 2015.
Rebecca Benneyworth and Anita Monteith from the Tax Faculty were well equipped with an advance draft of the treasury guidance to explain how the new dividend tax rules will work and the implications for incorporation decisions in a free webinar.
Rebecca and Anita revealed that the £5000 dividend tax allowance is not really an allowance. The money is a zero-rate of income tax which is applied to dividend income only, but it will apply to all taxpayers regardless of their marginal tax rate.
Dividends are currently taxed as the highest slice of income, so they are always subject to the taxpayer’s highest marginal tax rate. The application will continue but the first £5,000 of that dividend income will be taxed at zero rate.
Dividends in excess of £5,000 will be taxed at:
The March 2015 Budget announced that a personal savings allowance of £1000 for basic rate taxpayers and £5000 for higher rate taxpayers is expected to apply from the 6th April 2016. However, this will be restricted to savings income only and will not apply to 45% of taxpayers. You can also expect from the same date, that all interest paid by banks and building societies will be paid gross without tax deducted.
- 7.5% within the basic rate band
- 32.5% within the higher rate band
- 38.1% in the additional rate band
There are likely to be problems for investors with significant dividend income from the dividend tax proposals, it will also represent a bombshell for small business owners paying themselves low salaries but large dividend amounts. This means the amounts of tax payable are likely to increase significantly.
There are many implications for taxpayers whose dividend income pushes the thresholds of £100,000 where personal allowance is taken away and £50,000 where child benefit is also withdrawn. Individuals like this will find they are able to keep more of their personal allowance or child benefit in 2016/17.
Reducing the advantages of taking profits out of limited businesses as dividends, will achieve the Chancellor’s intended strategy to suppress the volume of incorporations which have taken place over the past decade.