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For an up-to-date summary please visit our budget updates page.
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:
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.
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