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Summer Budget 2015: New dividend rules – how it affects you

14 July 2015

From 6th April 2016, the way in which dividends are taxed will be overhauled.

Currently, dividends carry tax credits.  For many years shareholders have been able to use this tax credit to plan when extracting income from their companies.  The big advantage to the repayable tax credit is that where dividends are paid to shareholders up to the basic rate band limit, no income tax is payable.  Using 2015/16 as an example, individual shareholders can extract total net income of £39,200 from their companies and provided that they have no other sources of income, no tax will be payable on this sum.

What do the new rules mean?

The tax credit will be abolished with effect from 6 April 2016.  Instead, taxpayers in receipt of dividends will receive an additional £5,000 allowance in addition to their ordinary personal allowances.  The dividend tax rates will also be adjusted to:

  • 7.5% for basic rate tax payers
  • 32.5% for higher rate tax payers
  • 38.1% for top rate tax payers

The basic rate band effect

2015/16

2016/17

Salary

£10,600

£11,000

Dividend received

£28,606

£32,000

Tax credit

£3,179

£0

Gross income

£42,385

£43,000

Less personal allowance

£10,600

£11,000

Less dividend nil band

£0

£5,000

Tax payable

£0

£2,025

Effective rate of tax

£0

4.7%

What happens next?

It is crucial that any extraction planning is undertaken in good time prior to 5 April 2016 to ensure all potential tax savings are maximised before the change takes place.

Author – Kirsty MacDonald – Senior Tax Manager

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