How changes to dividend tax will affect you depends on your income and how your money is invested. The changes introduce complicated rules that mean it may be wise to seek advice on how to minimise the impact on your individual circumstances and make sure you don’t face an unexpected tax bill.

The changes come into force from 6 April 2016 and abolish the notional 10% tax credit on dividends, a move which the government estimates will generate £6.8bn more for the exchequer by 2020-21.

A new £5,000 tax free dividend allowance will be introduced.  Dividends above this level and which fall within the basic rate tax band will be taxed at 7.5%, 32.5% at the higher rate, and 38.1% at the additional rate.

Who won’t be affected
Dividends received by pensions and ISAs will be unaffected by these changes. In addition, dividends below £5,000 paid by UK companies (i.e. direct shareholdings) and UK authorised mutual funds (Unit Trusts and OEICs) will not be affected.

Who will be affected?
Business owners remunerating themselves by dividends and individuals receiving dividends over £5,000 from UK companies and UK authorised mutual funds will be affected.

Higher earners, who retain more income by paying themselves in dividends, rather than wages, will by and large be worse off when dividend tax rates rise by 7.5 percentage points for the 2016-17 tax year.

However it is worth noting that even after the reforms; remuneration through dividends will in most cases continue to incur less tax than through salary or being self-employed.
Anyone who receives dividends of more than £5,001 will need to complete a self-assessment return from 6 April 2016.

How the £5,000 dividend allowance will work
Typically, allowances have reduced taxable income e.g. the personal allowance. Dividends received within the dividend allowance still count towards taxable income and actually reduce your Basic Rate Tax (BRT) / Higher Rate Tax (HRT) band, which potentially pushes other income into the HRT/ART (Additional Rate Tax) bands. So it is in effect a floating ‘zero-rate tax band for dividends’ and the HRT threshold in 2016/17 will be £43,000 and not £48,000 as might be expected.

Avoid an unexpected tax bill
The new dividend tax changes are complicated; we would recommend anyone receiving dividends, should talk with their Cullen Wealth consultant to avoid incurring an unexpected tax bill.