All shareholders who receive dividends from 6 April 2016 will be affected by new rules introduced in the Summer 2015 Budget. Under the new regime, many shareholders receiving more than £5,000 of dividends will be considerably worse off. However, sensible planning can be undertaken to ease the pain!This months newsletter highlights the dividend tax regime change from 6th April 2016.
The new regime from 6 April 2016
The Summer 2015 Budget included a series of bombshells, increasing tax rates and reducing reliefs for those in business. In the Budget, a new tax regime was announced which will affect everybody who receives dividends. Those who receive dividends of less than £5,000 will generally be better off, most of the rest and certainly those in receipt of large dividends will be considerably worse off. Here we look at how the new rules will affect those people who either own their own companies or have stakes in privately owned companies.
When do the new rules commence?
The rules are effective from 5 April 2016 i.e. for dividends paid after that date. As far as you can tell, what are the new rules? The main points are that:
Dividends no longer carry a tax credit.
The first £5,000 of dividends will be taxed at 0% for everybody.
After that the rate of tax on dividends will depend on the rate at which you pay tax. The table below shows the current rates and the increased rates from 5 April 2016.
Why do you think that the government have done this?
Although the Government referred to modernising the tax on dividends, it appears to amount to simply an extra tax. The Government has long been concerned that owners of private companies pay themselves dividends to avoid National Insurance and most would think that this is an
attack on that position.
Will anybody be better off?
Yes, in particular those with a smaller level of dividends; certainly those higher rate tax payers with dividend income of less than £5,000 will be
Will anybody be worse off?
It’s a Budget change – what do you think! Most owners of private companies will be about 6% worse off in respect of dividends paid after 5 April
2016, after adjusting for all taxes.
What planning can I do to reduce this increase?
There is not a one solution fits all answer to this but there are a number of possibilities which include:
Bringing forward dividends to before 5 April 2016 i.e. before the increase in tax, this has the disadvantage of making the tax payable earlier but avoids the additional charge from that date. This may not be worthwhile if it meant your marginal tax rate were to increase in the earlier year.
Passing shares to family members, spousesand adult children to take full advantage of their personal allowances and the new dividend tax allowance. It looks as though an individual will be able to receive at least £16,000 of dividends tax free from 6 April 2016 if they have no other income. This might be a way of funding university fees until anti-avoidance legislation is introduced!
In some instances, moving back to an unincorporated business may be attractive or setting up an unincorporated business side by
side with a company.
Paying interest on Directors’ loan accounts can also reduce the tax rate, interest is taxed at a rate that is effectively 6% less than the dividend rate.