As we approach Christmas we thought we would spread some Christmas cheer amongst our readers by looking at a major change in the taxation of dividends that is taking place from April next year.
Currently, dividends carry a “notional tax credit” of 10%. A dividend of, for instance, £9 is treated as if it is actually a dividend of £10 from which tax of £1 has already been deducted at source. If the person receiving the dividend is a basic rate taxpayer then there is no further tax to pay. A higher rate taxpayer will pay additional tax at an effective rate of 25%. However, the tax credit is notional because the right for a non-taxpayer to reclaim this tax was removed several years ago.
From 6th April 2016 the tax credit is totally abolished. Instead, each taxpayer will have a dividend allowance of £5,000 and will, therefore, be entitled to receive the first £5,000 of dividend income completely tax-free. However, all dividends above this level will be taxed on the recipient. If the taxpayer is subject only to tax at basic rate then the dividend income will be taxed at 7.5%. However, a higher rate taxpayer will pay tax of 32.5% on dividends, with additional rate taxpayers paying 42.5%
If you are a typical small business operating through a limited company and paying yourself mainly by means of dividends then you will be hit particularly hard by this change. For instance, a company making a profit of £50,000 a year and which pays the owner a small salary of about £8,000 with the balance paid out as dividends will find its overall annual tax bill increasing from about £11,000 to about £13,000. If the profits were £70,000 then the additional tax payable will be nearly £3,000!
So where does the Christmas cheer appear? Well, anyone receiving dividend income of £5,000 or below each year will be no worse off, and higher rate taxpayers will actually save the 25% tax currently payable on their dividends Someone receiving dividends of £4,000 will, if those dividends are all taxable at higher rate, be £1,000 better off.
And even some high-earners with substantial dividend income will find themselves better off. For instance, someone earning about £75,000 a year through their PAYE employment, such as a typical Member of Parliament, and who is also receiving dividend income of about £30,000 will find themselves about £600 better off each year!
Finally, the partners and staff of WatkinsonBlack would like to take this opportunity to wish you all a very Happy Christmas and a Prosperous and, above all, a Healthy 2016.
WatkinsonBlack are pleased to advise on these and other matters. They have considerable experience in all areas of taxation and businesss services, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.
Published in Warrington Worldwide November 2015