George Osbourne, the Chancellor of the Exchequer, announced in his most recent 2016 Budget new changes to the way dividends are to be taxed and will be introduced for the new tax year 2016/17. A dividend, that is a payment made to a company’s shareholders out of said company’s profits, are being taxed in a new way to benefit the overwhelming majority of the UK population with what the government says is a much simpler system. However, some will be worse off under these new rules, and we look below at just what the impending dividend changes mean for businesses and individuals in the new tax year.
What’s Being Changed?
As of April 2016 the dividend tax credit that has previously been in place is being abolished, instead being replaced by an annual £5,000 tax-free Dividend Allowance, which will be subject to personal income limits.
Alongside this, there will also be three tax bands affecting how much you take away with your dividends after tax. The previous dividend tax rates looked like this:
- Basic Rate (income at or below £42,385) – 10% (0% after tax credit deductions)
- Higher Rate (income of £42,386 – £150,000) – 5% (25% after tax credit deductions)
- Top Rate (income above £150,000) – 5% (30.6% after tax credit deductions)
Previously, a company would pay corporation tax on the dividends and then individuals would, after taking a salary equivalent to the personal allowance, be left to take the remainder with zero tax up to the higher rate threshold as can be seen above. Now, altering the salary and paying the 20% corporation tax, the dividend is only free up to the first £5,000, with the new rates being changed to:
- Basic Rate – 7.5%
- Higher Rate – 32.5%
- Top Rate – 38.1%
The table below shows examples of how you would be affected under the new system:
| Dividend Income | Dividend Tax 2016/17 | Dividend Tax 2015/16 | Variance |
|---|---|---|---|
| £15,000 | £750 | £ – | £750 |
| £25,000 | £1,500 | £ – | £1,500 |
| £50,000 | £7,875 | £5,348 | £2,527 |
| £75,000 | £16,000 | £11,598 | £4,402 |
| £100,000 | £25,500 | £20,233 | £5,267 |
| £125,000 | £35,000 | £26,483 | £8,517 |
| £150,000 | £43,741 | £34,097 | £9,644 |
| £175,000 | £53,266 | £41,736 | £11,530 |
| £200,000 | £62,791 | £49,374 | £13,417 |
Source: Wellers Accountants
The Advantages To The New Changes
Osbourne has said that to receive a dividend of over £5,000 from a shareholding, you would need to have invested over £140,000 in that particular business; clearly a large sum and the amount of people that fall into this bracket is relatively small, and so the new dividend changes should affect only a small majority.
Alongside this, the tax free personal allowance is being raised to £11,000 in April 2016, and £11,500 in April 2017, and the higher rate threshold is being raised to £43,000; benefits that in some way negate the new changes to dividend taxation for some.
The Disadvantages To The New Changes
However, it appears that the new dividend taxation changes also bring with them several disadvantages. Firstly, it may have an effect on sole traders who look to incorporate their businesses and investments by combining their dividends and salary as the overall amount they earn will rise, leaving them exposed to the higher rate of tax.
Along these same lines, these changes are most likely to affect those who have a small pension or non-dividend income and who receive much of their income through shares. This means individuals may want to think about switching their income to capital-growth-focused investments as opposed to dividends, although this approach may not work for basic-rate taxpayers who would pay 10% on growth as opposed to 7.5% on dividend income above £5,000, whereas it would be 20% compared to 32.5% respectively for higher rate earners.
Higher rate taxpayers who receive over £21,666 a year in dividends will be affected for the worse by the new changes, as will any top rate taxpayers who earns over £25,250 a year. However, if individuals who fall into the higher or top rate of tax take less than £5,000 a year in dividends, they will be better off under the new system.
The Chancellor has estimated that it will generate tax revenues of roughly £500million per year by 2019, and some believe it has been done as an attack on “Tax Motivated Incorporation”. These changes have not been set in stone yet, and are currently under review. However, they are looking highly likely, and it is important that both businesses and individuals review their current situation and prepare appropriately to evaluate their options before the end of the current tax year. Some believe the new Dividend Tax will negatively affect small businesses, and a petition has been launched on the issue asking the government to reconsider.
Recently the Telegraph published an article stating that 90 percent of savers have no idea what a savings allowance is, leading them to ask “does anybody understand what’s going on?” with the new announcements in the Budget 2016. Anna Bowes, co-founder of Savings Champion, says that “the concern is that with too much choice, savers will end up making uninformed decisions, or worse, do nothing and leave their funds languishing in the bank.” The message here is to ensure you read up on the new changes announced in the Budget 2016, and be sure to use tools like The Telegraph’s Tax Calculator to work out which route is best for you to take.
