Submitted by Sestini & Co
| on Fri, 10/30/2015 - 12:17 | In Accounting and systems
From April 2016 new tax rules will affect dividend income. HMRC has produced a factsheet on the new tax-free Dividend Allowance which replaces the current Dividend Tax Credit.
HMRC claims that “this simpler system will mean that only those with significant dividend income will pay more tax” however the situation isn’t as simple as that.
A simpler system – but will you pay more tax?
We provide some examples to help you identify how this will affect you – and we’re happy to talk through the ramifications with clients to help you prepare before the changes come into place next year.
The new scheme means that no one will have to pay tax on the first £5,000 of dividend income, irrespective of whether or not you have any non-dividend income.
Those who have significant investments and significant income from shares, are likely to face a higher tax bill whilst those with a lower income from dividends may find a reduced tax bill or no change in the amount of tax they owe. Basic rate tax payers who receive more than £5,000 in dividends will pay more tax.
Pensions and ISAs
We’ve a number of clients who receive dividends from pension funds – we’re pleased to advise that these will continue to be exempt from tax, as will dividends received on shares held in an Individual Savings Account (ISA).
Small company directors
Directors of small companies who take significant amounts of income in dividends are likely to pay higher amounts of tax under the new scheme as they will now be paying 7.5% tax on some income within the basic rate band, rather than 0% as currently.
We’ve included a calculation below to show the effect of the changes.
New tax rates on dividend income
The rates of tax due are also changing, with the new rates payable on any dividends you receive over £5,000 being:
- 7.5% on dividend income within the basic rate band. So for earnings of £0 to £32,000, tax at 7.5% is payable from £16,000 to £32,000 (after taking into account the standard Personal Allowance of £11,000 and the new tax-free Dividend Allowance of £5,000)
- 32.5% on dividend income within the higher rate band. For earnings of £32,000 to £43,000
- 38.1% on dividend income within the additional rate band for earnings above £43,000
If you’d like to be able to check your tax position or to find out whether you should consider altering the way you take your remuneration, call us on 01761 241 861 or email us today. We will be pleased to advise you or to invite you into our offices in Paulton, near Bristol and Bath, for a consultation.