Are you ready for the proposed changes to dividends from April 2016?
From April 2016 all individuals will be able to receive £5,000 of dividend income with no tax liability at all. The changes are aimed at small companies who pay their shareholders (who are usually the directors also) a small salary (to avoid NI and maintain State Pension entitlement) and a dividend.
So, after the £11,000 personal allowance from April 2016, if your entire income is £11,000 salary and £5,000 dividend you will pay no dividend tax.
For dividends in excess of £5,000 there are new tax bands as below:
7.5% (basic rate)
32.5% (higher rate)
38.1% (additional rate)
Generally, people who receive in excess of £5,000 dividends (e.g. owners of limited companies) will pay more tax under the new system.
As an example, someone earning £11,000 salary and receiving £50,000 dividends will pay additional tax of approximately £2,500 more than under the old system.
Some further example are given in HMRC’s dividend allowance fact sheet.
A final sting in the tail is that people who receive in excess of £5,000 dividends will now need to prepare a self assessment tax return as there will be additional tax due.
Adequate tax planning is essential in order to minimize the effect of the changes.