New Dividend Tax – What it means…and how to pay as little as possible

Articles 26.08.2015 Author: Michaela Lamb

As you may be aware, from 6 April 2016, HMRC is abolishing the dividend credit which is currently applied to dividends received.

Under the current legislation, when calculating the tax due on dividends and taking into account the dividend credit, the effective rate of tax on a dividend for a 40% tax payer is 25%.

Under the new legislation, the rate of tax is being fixed at 32.5%, without a tax credit. Instead, the government is allowing everyone to take dividends of up to £5,000 each per year tax free, and only the excess received above this amount will be taxable.

For higher rate tax payers with lower levels of dividends, this will actually lead to a lower tax charge, but as the level of the dividend increases, the tax saving is eroded, and leads to more tax being payable.

For higher rate tax payers who remain within that band, and do not exceed the £100,000 personal allowance threshold or fall into the additional tax rate band of 45%, the break-even point for the tax on dividends (comparing both regimes) is just over £21,600 per annum.

If you are planning to take dividends of less than this, and you are likely to continue to be a higher rate tax payer, then it will be more efficient to wait until after April 2016 to do so. If the dividends are going to exceed this, you would be better to do this in the current tax year, or split the dividend between the two tax years.

Further information

If you are looking to take dividends, we can calculate the tax liabilities for you under each regime and confirm whether splitting the dividend would be preferable. Simply contact the author as below.

About the Author

Michaela Lamb

Tax Director +44 (0)20 7309 3851