Changes to Dividend Tax – Budget Update

 

 

HMRC confirmed how the new dividend tax for 2016/17 would operate last week when they posted a “factsheet”.   No official details on this had been published before as there was no explanation with the Budget. 

 

We now know that the first £5,000 of dividends received by an individual will be tax free, and that this allowance is in addition to the general personal allowance (set at £10,800 for 2016/17). For most owners of SMEs this is insufficient to offset the additional 7.5% tax which will be charged on all dividends over the £5,000 allowance, but will provide an incentive to make sure that all shareholders receive a dividend of at least £5,000 where possible. 

 

There is also a “sting in the tail” as the sixth example in the factsheet shows that where a shareholder receives dividends some of which are taxable at the basic rate and some at the higher rate, the £5,000 allowance is given against the basic rate (at 7.5%) instead of the higher rate (at 32.5%) – this means that the extra tax bill will be up to £1,250 pa more than we were expecting. The overall effect on individual director/shareholders will vary depending on their circumstances, and this will need to be carefully considered before next April.