All change to Dividends and their tax

01 August 2015

Some were 'headline grabbers' and others, which also have a significant effect, were less obvious.Many of these changes were detailed in the Chapters Financial Blog of 08TH July 2015.

One significant change which has not attracted much press coverage yet (I have no doubt it will do when the new tax year approaches), is the way dividend income will be taxed from the tax year 2016/2017 in around 8 months' time.This was highlighted in our July Blog, however, I wanted to concentrate on this issue a stage further, and some of the aspects of financial planning that some may want to consider.

Dividend tax credits are to be scrapped, with a £5,000 tax-free allowance for dividend income instead from the new tax year, starting 06 April 2016.

The rates of dividend tax will be set at:

  • 7.5% for basic rate tax payers (Currently income up to £42,385 gross 2015/2016)
  • 32.5% for higher rate taxpayers (Currently income up to £150,000 gross 2015/2016)
  • 38.1% for additional rate payers (Currently income above £150,000 gross 2015/2016)

Dividends paid within pensions and ISAs remain tax free and unaffected.

For reference, the current taxation of dividends can be found here:

https://www.gov.uk/tax-on-dividends/how-dividends-are-taxed

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Personal Planning

For those that hold investments that generate dividend income up to £5,000 pa gross, the planned change should be good news. Indeed, I was asked this week by a client if ISAs had a real advantage in the future in her circumstances. They do still maintain real advantage from a tax perspective.

The ability to invest assets into ISAs is attractive and where possible and prudent, it is possible to move/switch taxable assets into tax efficient ISA plans (within limits /currently £15,240) each year if the annual allowance is not used elsewhere.This avoids the tax changes noted above for dividend income and also means that any capital gain achieved is also exempt from any capital gain calculation.

We also have to bear in mind that many investments that attract dividend income also have the ability to produce capital gains and the current Capital Gains tax allowance of £11,100 in this tax year (2015/2016) remains attractive both now, and I am sure will remain so in future tax year.

Business Planning

From a business perspective, many directors pay themselves a small salary, possibly £6,000 per annum gross and then pay the balance of their income as dividends. This can have a tax advantage to them of reducing National Insurance Contributions, bringing the total tax costs down. With the changes noted above, I am sure there will be much planning as to the way future remuneration will be paid, possibly increasing salary levels, to balance between the two. If you, or working with your accountant, need help and advice on this topic, taking into account the ways this could affect issues such as future pension contributions, then please let us know.

Getting Advice

These changes may have an effect on your own financial planning and if you would like to review your existing arrangements then please let the team at Chapters Financial now.

The team at Chapters Financial look forward to helping you with your financial planning. As usual, no individual information and advice is provided during the course of this blog and we can be contacted at our Woking or Guildford offices.

Keith Churchouse FPFS
Director
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner

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