As we mentioned in last month’s newsletter, from April 2016, the present dividend tax credit of 10% is being abolished and is being replaced with an annual dividend allowance of £5,000.
To recap, dividends received in excess of the £5,000 allowance will be taxed at increasing rates according to your highest rate of Income Tax:
- 7.5% if you are a basic rate taxpayer
- 32.5% if you are a higher rate tax payer, and
- 38.1% if you are an additional rate tax payer.
These changes will make a difference to all limited company shareholder/directors who presently receive a small salary and large dividends. Many will be paying more tax as a result.
We recommend that all affected readers undertake a review of their tax position from April 2016 so that they are aware of the financial impact on their personal disposable income.
But what about tax payers who receive significant dividend income from diverse investments and do not, necessarily, run their own company?
If your dividend income is likely to exceed the £5,000 limit you could consider the following actions to minimise any additional dividend tax:
- Make sure you use the ISA limit to transfer high dividend yield shares into this tax free environment.
- Each person will be entitled to the £5,000 relief so spouses could consider equalising their share holdings in an attempt to make the most of their individual £5,000 allowance.
- As the additional tax, on dividends received in excess of the £5,000 limit, is at higher rates for higher rate and additional rate income tax payers, consider transferring shares to a lower taxed spouse to restrict tax to the lower 7.5% rate.
- If you are a higher or additional rate tax payer and you have significant dividend income, you could look for ways to reduce your overall taxable income and therefore reduce an additional dividend tax charge. For example, by deferring withdrawals from a drawdown pension.
If it is likely that you will be crossing the £5,000 Rubicon next year, now is the time to plan an effective tax mitigation strategy. Please call if you would like our assistance.