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.