Summer Budget 2015
One of the most significant, but under reported, changes in last week’s Budget was the increase in tax on dividend income. This was balanced to some extent by a tax free allowance for the first £5,000 of dividend income but will still mean an increase in tax payable for many of our clients.
These changes will be included in Finance Bill 2016 and will come into effect on 6 April 2016, leaving little or no planning time after the final legislation is passed.
New Dividend Tax Rates
From 6 April 2016 dividend tax credits will be withdrawn and the following rates of tax will apply to dividend income over and above the £5,000 tax free dividend allowance:
|New dividend rate from April 2016||Current effective rate 2015/16|
|Basic rate of income tax:||7.5%||Nil|
|Higher rate of income tax:||32.5%||25%|
|Additional rate of income tax:||38.1%||30.6%|
For many years there has been no effective tax charge on dividends for basic rate taxpayers, in recognition of the corporation tax paid by the company. The new rates mean a significant increase in tax liabilities for shareholders, where a large part of their income is in the form of dividends.
By way of example in the current tax year 2015/16, someone receiving only a small salary of £10,600 and dividends of £28,600 would pay no income tax. In 2016/17, the same level of income will create an income tax liability of over £1,700. There will be further increases for higher and additional rate tax payers.
Salary or Dividend
For many businesses where the directors are also shareholders, it has been most tax efficient to pay a low salary with dividends forming the balance of the shareholders income. The new tax rates will narrow the differential between salary and dividends significantly and shareholders will wish to review their method of profit extraction accordingly.
Assuming that the dividend tax changes take place as announced, the new tax rates come into effect on 6 April 2016. Shareholders and directors may wish to review their remuneration strategy to ensure it is most tax efficient. For example it may be possible to:
- Transfer shares to a lower earning spouse;
- Accelerate dividends prior to 5 April 2016 in order to take advantage of the lower rates;
- Charge interest on money lent to a company in order to use income tax free interest allowances;
- Control dividends in future to avoid the higher rate bands and a 32.5/38.1% tax charge.
All the above items come with pitfalls and criteria so please contact us for advice before implementing any of them.
If one of the options is of interest or if you would like further advice on lowering your tax liability please contact our Tax Director, Jenny Marks.
To see our other news items please visit our Muras Baker Jones – Blog.