Taxation of Dividends: a new regime for individuals

  • September 04, 2015
  • By Hunters Law

In the July Budget, the Chancellor announced substantial changes to the taxation of dividends for individuals.

With effect from 6th April 2016, dividends will no longer be paid to individuals with a notional 10% tax credit.  Part of the rationale behind the notional 10% tax credit was that it mitigated double taxation, as dividends are paid out of company profits which have been subject to Corporation Tax.  The 10% dividend tax credit also simplifies matters for basic-rate and non-taxpayers, with no further tax liability for them on dividends received.

Under the new regime, every individual will have a dividend tax-free allowance (in addition to the Personal Allowance for Income Tax) of £5,000 per tax year.  Dividends received in excess of £5,000 will be taxed as follows:

  • 7.5% for basic rate taxpayers (under the current system they pay no Income Tax);
  • 32.5% for higher rate taxpayers (under the current system they pay Income Tax at an effective rate of 25%); and
  • 38.1% for additional rate taxpayers (under the current system they pay Income Tax at an effective rate of 30.56%).

In short, individuals who receive substantial dividend income, such as business owners and private investors, will pay more Income Tax under the new rules. However, most small investors will pay a similar amount in Income Tax to what they pay under the current rules.

The new dividend taxation regime will not affect the tax reliefs for dividend-producing investments in pensions and ISAs.

For more information, please contact the partner having responsibility for your affairs, or any partner in the Private Client Department.

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