Tag Archives: dividend tax

Dividend Allowance Changes

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The new dividend tax regime was introduced by former Chancellor of the Exchequer George Osborne. This has only been in place since April 2016, but it is already to be amended in April 2018, following announcements in the Spring 2017 Budget.

Before April 2016, a basic rate taxpayer paid no tax on their dividend income. Only higher rate or additional rate taxpayers paid tax on their dividend income at an effective rate of 25% or 30.6% respectively.

Since April 2016 the first £5,000 of dividends has not attracted any tax liability and dividend income above £5,00 has been taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

In the recent Budget the new Chancellor announced that the tax-free dividend allowance of £5,000 will be reduced by £3,000  to just £2,000 for dividends paid on or after April 2018

So what will this mean to you?

Since April 2016, if you have no other income, you can earn up to £16,000 in dividends (£5,000 dividend allowance + £11,000 personal allowance) and pay no tax. Above this you have to pay divided tax.

But from April 2018, you will only be able to earn up to £13.500 in dividends (£2,000 dividend allowance + £11,500 personal allowance) and pay no tax, subject to the Autumn Budget.

This will mean shareholders will be worse off by £225 a year if they are basic rate taxpayers, £975 a year if they pay higher rate tax or £1,143 a year if they are liable at the additional rate. FOr a couple who share the running of their company, this is doubled to £450, £1,950 or £2,286 depending on the tax rate.

What should you be planning?

Provided your company has sufficient distributable profits, directors should consider accelerating dividend payments before 6 April 2018 to benefit from the current dividend tax-free allowance of £5,000 before it reduces.

If you would like more information on this subject, please get in touch on 01872 271655 or email neil.brittain@kelsallsteele.co.uk

Changes to Dividend Tax

Dividend Tax Credits

Up until 5 April 2016 dividends paid by UK Companies normally had an attached 10% tax credit of the grossed dividend. Therefore if you received a dividend of £90, there would be a deemed tax credit of £10, making the total gross dividend £100.

This dividend tax credit was non-refundable but could be offset against a taxpayer’s other income tax liabilities.

Dividend Allowance

From 6 April 2016 the entire gross dividend is paid to the recipient with no “attached” dividend tax credit. However, a new £5,000 tax free dividend allowance has been introduced.  Dividends above this level will be taxed at 7.5% for basic rate (20%) taxpayers, 32.5% for higher rate (40%) taxpayers and 38.1% for additional rate (45%) taxpayers.

Do note that dividends received through ISA’s will be unaffected.

Taxpayers who receive dividends in excess of £5,000 will from 6 April 2016 be required to complete a Tax Return form in order that the tax charge can be collected by HMRC. This is in contrast to earlier years where basic rate taxpayers had no additional liability due to the benefit of the attached tax credits and hence no need to contact HMRC.

If you would like further information on this topic, please don’t hesitate to contact Martyn Gillingham on 01872 271655 or via email at martyn.gillingham@kelsallsteele.co.uk

Basic Rate: Getting an Extension

In 2016/17, providing your total income is less than £100,000 you will receive a personal allowance of £11,000 i.e. the first £11,000 of your income will be tax free.

After that, your next £32,000 of income will be taxed at the basic rate. For most non-dividend income this will be at 20%.

After that, if your income falls between above the £32,000 but below £150,000 you are straying into higher rate territory and for most non-dividend income, the tax rate will be 40%.

You can however extend your basic rate band so that more of your income is taxed at the lower, basic rate. There are two ways of doing this :

  • Feeling charitable? Make sure you keep track of all the times you make gift aid payments to charities. Remember that this can sometimes include entrance fees, for example to zoos or aquariums. It could also include membership fees, for example to the National Trust. The payments you make are deemed to be made net of 20% tax, and your basic rate band is extended by the grossed up payment. If you make a payment to the NSPCC of £60, your basic rate band will be extended by £75. This means that your new basic rate band will become £32,075.
  • Planning for the future? If you make payments into a pension scheme, the same rules apply. You gross up the payments and extend your basic rate band accordingly. So pension payments of £10,000 give you an extension to your basic rate band of £12,500 bringing it to £44,500.

This is also very attractive in light of the new dividend tax rules that will come into force from 6 April 2016. Dividends falling into your basic rate band will be taxed at 7.5% and 32.5% in the higher rate band. The bigger your basic rate band is, the more will be taxed at the lower rate.

If you would like any further information on your specific personal tax situation, please get in touch via email at lydia.williams@kelsallsteele.co.uk or phone 01872 271655