From 6 April 2016:
- The 10% dividend tax credit has been abolished with the result that the cash dividend received is the gross amount potentially subject to tax.
- New rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
- A new Dividend Tax Allowance will remove the first £5,000 of dividends received in a tax year from taxation.
The table below shows a comparison between the pre and post 6 April 2016 dividend tax rates.
|Dividend falls into||Basic rate band||Higher rate band||Additional rate band|
|Effective rate before 6 April 2016||0%||25%||30.6%|
|Rate from 6 April 2016||7.5%||32.5%||38.1%|
As always there are winners and losers from these changes to taxation of dividends.
A higher rate taxpayer who has dividend income of £5,000 or less, will be better off under the new rules. Under the prior rules, they had a tax liability of up to £1,250 (25% of £5,000). However, under the new rules they will have no tax liability at all.
The sole shareholder of a company who takes a small salary and then dividends up to the threshold at which higher rate tax is payable, will be worst off. Under the prior rules, they would have no tax liability on the salary (as the salary is below the personal allowance), and no tax on the dividends. Under the new rules, only £5,000 of the dividend will not be taxable. If the shareholder fully utilises his basic rate band in 2016/17 in the most tax efficient way, still would have a tax liability. The minimum tax liability for 2016/17 would be £2,025, compare to Nil in 2015/16.
If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley about the possible tax implications of the changes in dividends taxation.