Taxation of Dividends

BUSINESS BRAIN
Rennie Welch LLP

Q: I have heard that the way in which an individual’s dividend income is taxed has changed recently. Please can you explain this?
Anon

A: Significant changes to the taxation of dividends were announced in the Summer Budget last year and came into effect from 6^th April 2016. Dividends received from shares held in an ISA remain exempt for tax purposes.

The tax credit previously attached to dividends has been withdrawn and instead a £5000 dividend allowance has been introduced. The effect of this is that no tax is payable in respect of the first £5000 of an individual taxpayer’s dividend income.

Dividends over this allowance are subject to income tax at the rate of 7.5% where the dividend income falls within the individual’s basic rate tax band, 32.5% on dividend income falling within the higher rate tax band and 38.1% on dividend income falling within the additional rate tax band.

It is worth noting that whilst no tax is payable on those dividends falling within the £5000 dividend allowance, they are still included in an individual’s total income for tax purposes and are counted towards their basic or higher rate tax bands. This may affect the rate of tax paid on dividends in excess of the £5000 dividend allowance.

Business owners operating their business through a limited company should give some consideration to the method used to withdraw profits from the company and the structure of the business going forward as the changes to the taxation of dividend income may mean that the current strategies and structure are no longer tax efficient.

Rennie Welch LLP accept no liability on the basis of this article and detailed advice, taking into account individual circumstances, should be obtained before entering into any transaction.

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