New Dividend Tax From April 2016

New Dividend Tax From April 2016

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.