New Dividend Allowance

From April 2016 the UK legislation around Dividend Tax Credit will be replaced.

How much will these tax changes cost you?

From April 6 the Dividend Tax Credit will be replaced by a number of changes to dividends including a new Dividend Allowance in the form of a 0% tax rate on the first £5000 of dividend income each year.

The current system of tax credits on dividends was designed over 40 years ago, so it was certainly due a review.

The new measure will address the incentive for some people to set-up a company and make payments on dividends, rather than as wages, simply to reduce their tax bill.

In the past, some directors moved to dividends as it was seen as more tax efficient, especially with the National Insurance saving, because this was not levied on dividend income. This meant it saved the company 13.8% as well as a saving for the director.

With the increases to dividend tax rates, the tax differential between dividends and salaries will narrow to 6%. Now the reason to incorporate will need to be more considered, as any tax savings will be eroded by the cost of compliance.

Notwithstanding this, the changes ensure that ordinary investors with smaller portfolios and modest dividend income will see no change in their tax liability and indeed some will pay less.

U.K. residents will pay tax on any dividends received over the £5000 allowance at the following rates:

• 7.5% on dividend income within the basic rate tax band
• 32.5% on dividend income within the higher rate band
• 38.1% on dividend income within the additional rate band
• Dividends received on shares held in ISAs will continue to be tax free

So, only those with significant dividend income will pay more tax. It is said that around 1m individuals will pay less on their dividend income due to them following the introduction of the Dividend Allowance.

Nevertheless, it's worth placing yourself in the best possible position in response to the change.

For those who are likely to receive favourable dividend income in excess of the new £5000 allowance, there are some practical steps that could help reduce dividend tax liabilities under the new regime:

• Make use of your spouse's tax free dividend allowance too
• Make optimum use of tax bands and personal allowances
• Reduce your overall income levels
• Make full use of ISA allowances
• Make full use of pension wrappers such as SIPPS
• Minimise your taxable dividend income

So, these reforms may well encourage many investors to reconsider the tax position of their portfolio. GSM can highlight any potential changes to the tax payable by you and to advise how you might best mitigate the amount you’ll pay.

What the Government does argue is that the increase in dividend tax rates allows for further reduction in Corporation Tax and supports other measures to help businesses, such as the increase in the National Insurance Employment Allowance to £3000 from April and the permanent increase to the Annual Investment Allowance to £200,000 from last January.

For a more detailed analysis of how your finances will be affected by this change, talk to GSM, and we’ll undertake a personal review for you. We'll help you to balance the ratio of salary and dividends in order to maximise your income based on your existing circumstances and the income you require.

Contact us now to arrange a meeting.