As a reminder, the Finance Bill 2016 will abolish the 10% tax credit on dividend income, which will cease to be grossed up in personal tax computations from 6 April 2016. In its place will be a £5,000 dividend tax allowance.
Until now we had no firm details about how this dividend tax allowance will fit within the structure of personal allowances and tax rates, however the accounting profession has been working with the Treasury to produce some guidance which should be published on GOV.UK in the next few days.
It has been revealed that the £5,000 dividend tax allowance is not an allowance! It’s actually a zero-rate of income tax applied to dividend income only, but it will apply to all taxpayers whatever their marginal tax rate.
Dividends are currently taxed as the highest slice of income, so they are always subject to the taxpayer’s highest marginal tax rate. This will continue to apply, but the first £5,000 of that dividend income will be taxed at zero rate.
Dividends in excess of £5,000 will be taxed at:
– 7.5% within the basic rate band
– 32.5% within the higher rate band
– 38.1% in the additional rate band.
In 2016/17 you take dividends of £50,000 from your own company, and this is your only income in this year. The personal allowance is £11,000.
|Basic rate band :||(32,000)|
|Dividend ”allowance”||5,000 @0%||0|
|Higher rate band:||7,000||7,000 @32.5%||2,275|
|Total tax payable:||4,300|
While this may seem reasonable – an effective rate of personal tax of less than 9%, remember that the company will have already paid Corporation Tax on the profits (20% for 2016/7). This effectively means that a £62,500 pre-tax profit has been required, to pay a £50,000 dividend, giving you as the shareholder a net income after tax of £45,700. This then becomes an overall effective rate of tax of over 26%.
Meanwhile, the March 2015 Budget announced that a personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers is due to apply from 6 April 2016. We understand this will be restricted to savings income only and will not apply to 45% taxpayers. From the same date all interest paid by banks and building societies will be paid gross without tax deducted.
However, the legislation for the personal savings allowance was not included in the Summer Finance Bill. We will have to wait until the draft Finance Bill 2016 is published in late 2015 to pick over the bones of this new savings allowance, and the details of gross interest payments.
The dividend tax proposals represent a bombshell for small company owner managers paying themselves low salaries and larger amounts of dividends. The amounts of tax payable are likely to increase significantly.
These changes are also likely to give rise to higher tax payments (ie. lower net income) for investors with significant dividend income.
There are also implications for taxpayers whose dividend income pushes them just over the thresholds of £100,000 where personal allowance is withdrawn and £50,000 where child benefit is withdrawn. Those individuals may find they are able to keep more of their personal allowance or child benefit in 2016/17.
At Morrell Middleton we are continuing to keep abreast of the legislation being finalised and will keep you up to date up to a point where the ink is dry and planning decisions can be made.
(The above is based on an article in AccountingWeb – August 2015)