How could the changes to dividends affect you?

7 August 2015

As discussed in our tax blog earlier this week, the Chancellor’s shake-up of dividends has undoubtedly got taxpayers and advisors crunching their calculators to identify the most efficient dividend policy.

Currently basic rate taxpayers pay no tax on dividends, whilst higher rate taxpayers pay an effective rate of 25% with additional rate taxpayers paying 30.56%. From April 2016 the first £5,000 of dividend income will be tax-free, basic rate taxpayers will pay 7.5%, higher rate 32.5% and additional rate 38.1%.

Therefore, in most situations, the changes are going to increase the tax take and lead to higher liabilities for most business owners who extract profits by way of dividend. Not only is the question being asked about what is the most efficient dividend policy from 6 April 2016, we are also considering whether or not profits should be extracted before that date, under the current tax rules and rates for dividends.

Whilst we do not yet have the precise details of how the new rules will interact with a taxpayer’s other income, and so cannot answer questions with certainty yet, the likely impact on an individual who extracts the majority of their profits by way of dividend is demonstrated in the following graph:

dividend changes

Difference between tax due

The table below shows a comparison of the tax due between the current tax year and post April 2016:

Net Dividends 2015-16 Tax 2016-17 Tax Difference
£28,606 £0 £1,770 £1,770
£30,000 £348 £1,875 £1,527
£40,000 £2,848 £3,375 £527
£50,000 £5,348 £6,625 £1,277
£60,000 £7,848 £9,875 £2,027
£70,000 £10,348 £13,125 £2,777
£80,000 £12,848 £16,375 £3,527
£90,000 £16,541 £19,750 £3,209
£100,000 £20,233 £24,250 £4,017
£110,000 £22,733 £28,750 £6,017
£120,000 £25,233 £32,125 £6,892
£130,000 £27,986 £35,375 £7,389
£140,000 £31,041 £38,625 £7,584
£150,000 £34,097 £42,211 £8,144
£200,000 £49,374 £61,261 £11,887

Whilst other factors need to be considered, and each company has their differences, this should give you an overall understanding of the changes.

Please note, however, that the information provided in this blog post is provided as an indication only and is based on numerous assumptions.  It is important that you take further advice to determine what your options are.

For further information or to discuss your specific circumstances please contact Simon Browning or Elliott Buss below, or contact your usual UHY adviser at your nearest location.  Alternatively, you can complete our online contact form.