Fundamental Dividend Tax Changes

3 August 2015

George Osborne announced a huge shake-up to the taxation of dividends in his Summer Budget, which will impact all company shareholders.

Under the current system, company shareholders can receive dividends within the personal allowance and basic rate tax band of   £42,385 and pay no Income Tax at all due to the ‘notional tax credit’ that is carried on all dividends. With effect from 6 April 2016, that tax credit is to be abolished, and instead the same shareholder will now be charged tax at 7.5% on the dividends they receive in excess of a new £5,000 ‘dividend allowance’.

For shareholders within the higher rate bracket range of £42,386 to £150,000, the tax charge becomes 32.5%, up from an effective rate of 25%.

For shareholders paid larger dividends the cost is even greater, with a new 38.1% rate for ‘additional rate’ taxpayers with aggregate income over £150,000.

If your company is planning to pay you a dividend of £200,000 in addition to a salary of £50,000, the cost of poor timing could be over £12,500.

So, what can be done? Well there are measures that can be taken before the current tax year comes to an end, and with the Chancellor having also announced further reductions to the maximum annual pension contributions you can make, now is a great time to consider your overall remuneration structure.

To find out more, what options you have, and how we can help, please contact Matt HodgsonNick Hall or Sarah Whalley.