The summer budget saw the announcement that f rom 6 April 2016 there wi l l be major changes to the way in which an individual’s dividend income is taxed. In early August HMRC released the first guidance that shows how these changes will operate.
The good news is the introduction of a new tax free dividend allowance of £5,000 a year. The bad news is the 10% dividend tax credit is abolished and an increase in the rates of tax on dividend income.
What is the effect of these changes?
Anyone with dividend income up to £5,000, will either see a reduction in tax, or have no additional liability. For those with dividend income over £5,000 the tax position will depend on individual circumstances and rates of tax, but as a general principle there will be an additional tax burden of £750 per £10,000 of dividend income.
There are a number of possible tax planning strategies which can be used to minimise the effect of theses changes, and these would include:
- Paying dividends before 5 April 2016
- Use of spouse’s tax free dividend allowance
- Considering alternative profit extraction strategies (e.g. interest or rent)
Any alternative profit extraction strategy should consider the effect on both the company and the individual’s tax position. Tax payers below state retirement age will generally find it more efficient to take dividends rather than salary but this may not be the case where companies are entitled to claim R&D tax relief on employment costs. Alternatively shareholders who are able to charge interest or rent to their companies may find this method of profit extraction increasingly tax efficient.
We will continue to monitor these changes as they work their way through Parliament. However, given the potential for increased tax liabilities from 2016/17, this may be a good time to consider whether you can improve your tax position.