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2016/7 Tax Year – Part 2:Dividend Tax Changes

2016/7 Tax Year – Part 2:Dividend Tax Changes
When reviewing the recent Budget, one of the most fundamental changes that came into effect from 6 April 2016 were the changes to how dividends are taxed.

If we first look prior to the 2016/7 tax year, one of the greatest attractions in receiving dividends for company shareholders was the 10% tax credit, therefore resulting in no personal tax to be paid for Basic Rate Band individuals.

From April 2016 the government has abolished this dividend tax credit and in its place introduced a new dividend tax allowance of £5,000 a year.

But how does this impact your tax liabilities?

Firstly it is important to note that this £5,000 allowance is not actually an allowance. It’s a zero-rate of income tax applied to dividend income only, applying to ALL taxpayers whatever the marginal tax rate. Dividends in excess of £5,000 will be taxed at;

-          7.5% within the Basic Rate Band
-          32.5% within the Higher Rate Band, and
-          38.1% in the Additional Rate Band

If we put these changes to a real life example whereby a company shareholder takes a £8,000 salary and £22,000 via dividends, that individual will now pay an additional £1,050 in tax in the 2016/7 tax year compared with the previous tax year.

What is important to note however is that this does not mean tax planning surrounding dividends has gone! Dividends do still attract lower tax liabilities than taking remuneration solely via a salary and for Higher and Additional Rate Band individuals, the new £5,000 dividend allowance can actually reduce your income tax liabilities.

If you would like to know more about changes to dividend tax then please get in touch. Simply go onto our “Contact Us” page now or call us on 0121 706 8585.
2016/7 Tax Year - Part 1:Employment Allowance
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