How Will The New Dividend Tax Work?

How Will The New Dividend Tax Work?Written on May 12, 2016 by Kirk Rice LLP

From April 2016, the first £5,000 of dividend income each year will be tax-free. Sums above that will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. No tax will be deducted at source, and taxpayers must use self-assessment to pay any tax due. It’s important to remember that this change doesn’t affect dividend income from stocks and shares held within an ISA, or dividends received within authorised pension funds.

Winners & Losers

Not everyone will be worse off under this new system. Higher-rate taxpayers with £5,000 or less in dividend income will gain. Under the old system they would have paid 25% or £1,250 on dividends totalling £5,000, under the new rules their dividends fall within the tax-free allowance.

However, basic-rate taxpayers who receive more than £5,000 in dividends are set to pay more.

Dividend Income and the Personal Allowance

Dividend income is eligible for the personal allowance, so as a very basic example, assuming an individual has no other income and in tax year 2016–17 they receive £16,000 in dividend income, the first £11,000 would be covered by their personal allowance and the other £5,000 by the new dividend allowance, resulting in no further tax to pay

Planning Steps

Investors need to navigate their way around these new rules to avoid paying too much tax. In order to maximise the benefit of the £5,000 dividend allowance, married couples and those in civil partnerships should make sure that they spread their taxable portfolios between them to make the best use of their dividend allowance, personal allowances and basic rate bands. Using the annual ISA allowance of £15,240 and making pension contributions can help minimise the impact of this tax revision. Specialist investment plans like onshore and offshore bonds, which allow for tax deferment on income are another option for higher-rate taxpayers. If you haven’t reviewed your portfolio for a while, this could be a good time to revisit your investments in the light of this new tax regime.

If you would like to discuss your own personal situation please contact Kirk Rice on 01344875000 or email kirk.rice@kirkrice.co.uk

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