insideKENT Magazine Issue 50 - May 2016 | Page 153

BUSINESS

DIVIDENDS
HAVE BECOME
MORE TAXING
Rick Schofield

IN HIS SUMMER BUDGET 2015, THE CHANCELLOR ANNOUNCED THAT HE
WOULD BE INTRODUCING A NEW TAX REGIME FOR DIVIDENDS INCLUDING
A NEW TAX ALLOWANCE, STARTING FROM APRIL 2016. NOW THOSE NEW
RULES HAVE COME IN TO FORCE, MANY BUSINESSES AND INDIVIDUALS
ARE SEEING A GENUINE SIMPLIFICATION OF THE CURRENT RULES,
HOWEVER, THERE ARE STILL PLENTY THAT ARE FACING THE REALITY – THE
FACT THAT MANY PEOPLE COULD BE MUCH WORSE OFF.
What are the changes?
Prior to April 2016, there was a 10% tax credit
which existed on all dividends. This meant for
many basic rate tax payers, dividends could be
received entirely tax free, as long as they remained
within their basic rate band. Under the new
regime, which came in to effect on 6th April 2016,
all dividends are now received tax free up to
£5,000. Anything above that will be taxed at
7.5% (basic rate), 32.5% (higher rate) and 38.1%
(additional rate).
How will this affect those in receipt of
dividend income?
If your dividend income is £5,000 per year or
less, you will pay no tax on the dividends you
have earned, regardless of whether you are a
basic rate or higher rate tax payer. If you are a
higher earner of income with low levels of dividend,
then you are likely to find that this new allowance
will actually leave you better off. Why? Because
previously your earnings would have placed you
in the higher rate tax brackets, and, depending
how much you earned, you’d have been
subjected to 32.5% or 38.1% tax on the whole
amount of your dividend. Now, you will receive
the first £5,000 tax free.
However, if you are a higher earner with dividends
in excess of £5,000 then you may find the
opposite will apply and you could feel the pinch
from these changes. Director shareholders of
owner-managed companies are particularly likely

to suffer as they may historically have been taking
low wages and topping up their income with
dividend payments. Any individuals, including
pensioners, who currently rely on an investment
income are also likely to see an increase in their
tax liabilities.
Even basic rate tax payers aren’t safe. Looking
at a quick example of old versus new rules, if
you are a basic rate taxpayer that receives all
taxable income in the form of dividends, you
would previously have p