Search Magnifying Glass

New dividend tax regime confirmed

HMRC produce dividend factsheet

Following on from last week’s article, HMRC have now produced a Dividend Allowance factsheet confirming how the taxation of dividend income will change as from April of next year.

It verifies that individuals will not pay tax on the first £5,000 of their dividend income, no matter what non-dividend income they have. However, the dividend allowance will not reduce a person’s total income for tax purposes, ie the £5,000 allowance will count toward the basic rate or higher rate bands.

HMRC have produced a number of illustrations to demonstrate the way the allowance will work in different situations:

Example 1

Individual receives less that £5,000 per year in dividends.

No tax due as it is within the Dividend Allowance.

Example 2

Individual receives dividends of £600 from shares invested in an ISA.

Nothing changes. No tax is due on dividend income within an ISA regardless of the rate of tax a person pays.

Example 3

Individual is in receipt of non-dividend income of £6,500 and dividends of £12,000.

After setting off the income of £6,500 against the personal allowance of £11,000, a net personal allowance of £4,500 is available to set against the dividend income. Add to this the dividend allowance of £5,000, then only £2,500 of income is taxable at the basic rate dividend tax of 7.5%.

Example 4

Person receives non-dividend income of £20,000 and dividends of £6,000.

The personal allowance is used against non-dividend income but after setting off the dividend allowance, only £1,000 of dividends is taxable at 7.5%.

Example 5

Individual receives non-dividend income of £18,000 and dividends of £22,000.

After setting off the personal allowance against non-dividend income, £7,000 is taxable at the basic rate of 20%. Of the dividend income of £22,000, only £17,000 is taxable at the dividend basic rate of 7.5% after setting off the dividend allowance.

Example 6

Person has non-dividend income of £40,000 and dividends of £9,000.

Basic rate tax of 20% is levied on £29,000 of the non-dividend income (£40,000 – £11,000 personal allowance). There is £3,000 of the basic rate band still available (£32,000 – £29,000) but this will count towards the dividend allowance. The remaining £2,000 of the dividend allowance will be used in the higher rate band but essentially £5,000 is not subject to tax, although £4,000 is taxable at the higher dividend tax rate of 32.5%.

HMRC say that this “simpler system” will only affect those with significant dividend income, who will pay more tax. An investor with modest income from shares will either see a reduction in tax or no change in the amount they owe.

Using the illustration from last week’s article, lets see how our contractor Kate will be affected if she receives salary equivalent to her personal allowance and dividends of £70,000 for the current and following tax year.

 

  2015/16
£
2016/17
£
Salary 10,600 11,000
Dividends 77,778* 70,000
Less:  Personal allowance (10,600) (11,000)
Taxable income 77,778 70,000

Tax due:

£31,785 @ 10% = 3,178

£45,993 @ 32.5% = 14,948

Total = 18,126                                                           

Less:  dividend tax credit (7,778)

Total = 10,348

 

£5,000 @ 0% = 0

£27,000 @ 7.5% = 2,025

£38,000 @ 32.5% = 12.350

Total = 14,375

*Dividend grossed up by 10% tax credit of £7,778.

Kate’s income tax bill will increase by just over £4,000 if she maintains the same policy of profit extraction, so some rethinking will need to be done in 2016/17.

What is clear from this illustration is that the revamping of dividend taxation was not about simplification but rather tax raising.

The factsheet can be found by visiting Gov.uk

By Qdos Contractor

Comments

Add a comment

7 thoughts on “New dividend tax regime confirmed”

  1. Tom

    and following on from last weeks comments this is too simplistic and the tax situation may be far worse because the profits in the company used to distribute the dividend will have paid Corporation Tax which in part used to be offset via the tax credit which has now gone, as asked last week, does anyone have a clear example using the company income and corporation tax to give a full picture of the situation ?

  2. Richard

    Tom,
    the corp tax doesn’t change. In the example above it’s just £400 less profit, so £80 less CT) due to the extra salary in the tax year.
    R

  3. Mark

    Well the CT charge is unchanged until 2018/18 when the rate goes down to 19%. You will pay the same amount of CT plus the new dividend tax.

  4. Mike

    This will force a lot of people out of work! I can’t afford the extra 7/8k of tax a year, the example 6 above doesn’t take in to account the the tax credit which is now lost, also on the 5000 you have already been taxed at 20% CT. I was just about balanced on my tax and out goings, (just bought my first home etc. balanced everything to suit and added safety on, but it’s been destroyed) I have nothing I can cut back on.

  5. Nic

    I’m not sure much re-planning CAN be done for ‘Kate’ above. Example 3 may be a typical contractor who is below NICs and tax threshold (and probably has a bigger div income) – I think it pays them to take salary up to zero band (as per Kate) because they save 20% personal tax and it’s before CT (and maybe they want/should make a NIC contribution) – whereas using zero band for divs only saves 7.5% and that’s after CT.

    So if Kate can re-plan I’d like to hear it!

  6. Northernladuk

    @Mike, if 7k difference puts you out of work where is being inside IR35 by default in 2017 going leave you?

  7. T North

    Would be interested to know how the new UK tax regime compares with other European tax rates for similar personal services comapanies. I have no issue with moving abroad and paying tax to another country if the tax burden here becomes so great although i appreciate not everyone has that luxury.

    The government seems intent on destroying any incentive to be an entrepreneur in the UK.

    There should really be some rule that says noone should have to pay more than 50% of their earnings in tax – thats would be a simplification of the tax system and it would be fair.

Leave a Reply

Your email address will not be published. Required fields are marked *