Changes to Dividend Taxation from 6 April 2016

From 6 April 2016 the rules on Dividend Taxation have changed. This will have an impact on the way in which small single and multiple owner companies will chose to draw their profits or salaries.

Changes: 

  • The notional 10% tax credit on dividends has been abolished.
  • A £5,000 tax free dividend allowance has been introduced.
  • Dividends above this level are now to be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate)
  • Dividends received by pensions and ISAs will be unaffected
  • Dividend income are to be treated as the top band of income.
  • Individuals who are basic rate payers who receive dividends of more than £5,001 will need to complete self assessment returns from 6 April 2016.

Impact

The changes have been brought in as a result of the proposed changes to Corporation Tax. In the next few year corporation tax is set to be reduced. The reason for this is to make the UK market more attractive to multi-national companies who want to find a home where lower taxation prevails; think Ireland and Luxembourg for instance. At the same time the government does not want to create a driver for most employees who can afford it to change from sole trader or employment status to incorporated status. In effect HM Government wish to maintain a parity of taxation between the various methods of working/trading/employment. The only way to do this is to address dividend taxation calculations so as to more closely align them from taxation basis to each other.

The result of the changes is that whereas previously but only marginally it was more tax advantageous to trade as an incorporated business it is now marginally more advantageous to trade as a sole practitioner/partnership. Of course this excludes the other reasons for making the decision as to how to trade such as

  • Limited liability
  • Retention of profits
  • Transfer of ownership
  • Borrowing

If you need help in relation to your company please contact me Brendan O’Brien at brendan.obrien@breezeandwyles.co.uk or my colleague Donna Bromyard at donna.bromyard@breezeandwyles.co.uk or by telephone at 01992 558411.

 

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