ASK THE
ACCOUNTANTS
What are these changes in Dividend Tax? The Chancellor announced that from April 2016, dividend tax credit will be scrapped and replaced by a tax-free dividend allowance of £5,000 per person, per annum. In addition, the rates of taxation on dividend income above the £5,000 level have been increased to the following: • • •
7.5% for basic-rate taxpayers; 32.5% for higher-rate taxpayers; 38.1% for additional-rate taxpayers.
How might this affect me if….. I receive £10,000 of dividend income and earn £10,000 of non-dividend income.
I am a higher-rate taxpayer as a result of my non-dividend earnings and I receive dividends totalling £3,000 per annum. Under the new regime this individual would pay no tax on their dividend income, as it would fall within the £5,000 dividend allowance. Under the current rules this would be taxed at a marginal rate of 25%, giving rise to a tax bill of £750. Hence this individual would be better off by £750. As you can see from these examples, anyone with non-dividend income at or above the personal allowance level (£11,000 per annum) and receiving dividends above the £5,000 per annum level would be worse off under the new regime. This is because the marginal rates for all taxpayers on that dividend income are higher than they were previously. What can be done by your accountant? •
• The first £5,000 of dividend income would be covered by the dividend allowance, so would be tax free. The £10,000 of non-dividend income and a further £1,000 of dividend income would be covered by the personal allowance.
•
• The remaining £4,000 of dividend income will be taxed at the new basic rate of 7.5% for dividends, leaving £300 of tax to pay. This is £300 more than a taxpayer would pay under the previous regime – where, as a basic-rate taxpayer, the effective rate on dividends is 0% and the non-dividend income would have been covered by the personal allowance. Or if…..
•
Review and amend the structure of a limited company to minimise the personal tax liabilities of business owners. Advise on the tax efficiency of shareholdings to make use of any allowances which are available to the shareholder. Monitor and allocate any withdrawals by business owners as tax efficiently as possible throughout the year. Advise on potential liabilities periodically throughout the financial year so that share holders can ensure money will be available at due dates. Advise shareholders on the timing of dividends during the year to minimise tax liabilities where possible.
If you have an accountancy related question that you would like answered; simply contact us below and it could appear in the next issue...
TBD Chartered Accountants E: enquiries@tbdaccountants.co.uk | T: 0161 850 2804 @tbdtweeting @tbdaccountants