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Dividend changes - Autumn Statement

It was announced in the Summer Budget that there would be a significant change to the way in which dividends are taxed from April 2016.  In addition to the introduction of a new Dividend Allowance, the notional 10% tax credit will no longer attach to dividends, thereby eliminating the requirement to gross up dividend income in an individual’s tax computation.  As a consequence of this, the mindset of reserving 25% of a dividend to meet one’s higher rate tax liability (or 30.56% for additional rate taxpayers) will cease to be relevant and there will be no simple replacement rule of thumb.

The headlined introduction of the new Dividend Allowance, which means that individuals won’t have to pay tax on the first £5,000 of their dividend income, was initially welcomed.  However the publication by HMRC of a fact sheet on 17 August has confirmed that dividends within the allowance will still count towards the individual’s basic or higher rate bands, and may therefore affect the rate of tax payable on other income including dividends they receive in excess of the £5,000 allowance.

The following rates of tax will apply to dividend income received over £5,000:

7.5% on dividend income falling within the basic rate band
32.5% on dividend income falling within the higher rate band
38.1% on dividend income falling within the additional rate band

To illustrate how the changes might affect a high earner with dividend income of £90,000 for example, this individual would normally have to reserve £27,500 to meet their additional rate tax liability on their dividends.  The equivalent liability would increase to £32,385 under the new rules.

Broadly speaking, the only individuals who would appear to be either unaffected or better off financially by the new regime will be basic rate taxpayers and individuals with modest dividend income.  Higher and additional rate taxpayers will generally be worse off once their dividend income exceeds the £20,000 to £25,000 ballpark.

If you would like any more information about how the dividend changes affect you, please contact Alison Palmer or your usual Mercer & Hole contact.

 

 

Date: 26th November, 2015
Author: Alison Palmer

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