13 October 2015
In the Summer Budget 2015 the Chancellor announced changes to dividend tax which will come in on 6 April 2016. There are less than 6 months until the beginning of the new tax year so now is the time to consider how your dividends are held and whether you need to take action to structure them more efficiently for income tax purposes.
Currently, dividends are paid net of a notional 10% tax credit to compensate for the corporation tax that has already been paid by the company. For basic rate tax payers no further tax is due. Higher rate tax payers pay an additional 22.5% tax and additional rate tax payers an additional 27.5% tax on the grossed up dividend.
However, fundamental changes are due to be introduced in tax year 2016/17. Legislation has not yet been finalised but the following has been published in a policy paper. The notional tax credit will be scrapped and instead all individuals will have a dividend allowance where they will be able to receive £5,000 of dividends with no tax liability. After this sum, dividends will be taxed at 7.5%, 32.5% and 38.1% depending on whether the individual is a basic, higher or additional rate tax payer.
This change is mainly aimed at closing the loophole where businesses ‘pay’ their employees through dividends to avoid a full income tax liability. However, a number of people, particularly those who are retired and have built up an income generating portfolio will also be hit by these changes. Some of their dividends will now be subject to income tax where before it may all have been covered by the notional tax credit. In the past few years interest rates have been so low that many savers have been turning to investments instead to generate income.
Furthermore, anyone liable for the 7.5% tax rate on dividends will need to declare this via self assessment so this change in tax will put more tax payers into the self assessment regime.
There are options however to reduce the tax liability. Couples should consider splitting shareholdings if they have not already done so, to utilise both individuals’ dividend allowance. Note that Capital Gains Tax (CGT) implications should be considered before transferring assets in the case of a non married couple.
If one spouse or partner does not use the whole of his or her income tax personal allowance (£11,000 for 2016/7) then this may also be used for dividend income meaning an individual with no other income could have a dividend income of £16,000 before paying any tax.
Investing in a stocks and shares ISA is also a good way to shield dividends from the new tax. No income tax on dividends is due in an ISA and the individual allowance for 2015/16 is £15,240. Stocks and shares ISAs are also free of CGT. Existing shares you hold cannot be transferred into an ISA, so are generally sold and repurchased within the ISA. There are of course potential CGT implications as well as dealing costs and stamp duty. Remember that from 3 December 2014 onwards the value of ISAs held by a spouse on death can be inherited by their surviving spouse.
For more information about the new dividend tax rate and how it affects you or for other income tax, capital gains tax or inheritance tax planning advice contact Ross Brown.
Ross Brown, Associate firstname.lastname@example.org T. 0141 221 8012