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New Dividend Allowance to Replace Dividend Tax Credit

From April 2016, a new Dividend Allowance is due to replace the current Dividend Tax Credit, with the headline rates of dividend tax due to change as a result.

Available to anyone with a dividend income, Chancellor of the Exchequer George Osborne announced in July’s emergency (summer) Budget that the new Dividend Allowance will allow you to earn £5,000 of dividend income, tax free, with you only having to pay tax on dividend income received above this amount.

Our clients should note that the new Dividend Allowance will not reduce your total income for tax purposes: any dividends you receive will continue to count towards your basic or higher tax rate bands, and may in turn increase the rate of tax payable on dividends received above the £5,000 tax-free allowance. The new allowance will simply mean you’re not liable to pay tax on the first £5,000 of any dividend income you receive.

Headline Rates

Under the new Dividend Allowance comes new headline rates payable on dividend taxes. When you receive dividend payments over £5,000 in a single tax year you’ll be liable to pay tax on these payments at the following rates:

  • 7.5 percent in the basic rate band (currently 0 percent),
  • 32.5 percent in the higher rate band (currently 25 percent),
  • 38.1 percent in the additional rate band (currently 30.56 percent).

It’s important to note that basic rate tax payers are currently paying 0 percent on dividend payments over £5,000 as under the current Dividend Tax Credit system any tax liabilities above this amount are normally covered by the enclosed tax credit.

Because dividends are the most common, and preferred method for owners and investors in small and medium-sized businesses (SMEs) to pay themselves, dividends are often seen as the highest point of your income. For this reason, only those receiving a significant portion of dividend income will pay more tax under the new Dividend Allowance, as the above figures show. The Government predict that investors receiving a small to modest income from company shares will receive a cut in their dividend tax payments, or see no change in payments owed.

Dividend Exemptions

Despite the changes the new Dividend Allowance will bring, the exemptions available under the current system are due to remain.

Any dividends you receive into pension funds that are currently exempt from tax will continue to be received tax free. The same is true for dividends received on shares you may hold in an Individual Savings Account (ISA).

Experienced Tax Accountants

Here at Tax Agility we believe that if you’re an SME owner considering incorporation, you shouldn’t allow the rules of the new Dividend Allowance to affect your decision too much. Though the choice to incorporate should always be taken on a case-by-case basis, we recommend speaking with you accountant regarding any questions and concerns you may have.

To speak with a professional accountant to discuss the new Dividend Allowance, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

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