The Taxation of Dividends

As featured in The Southern Reporter - www.thesouthernreporter.co.uk

The way in which dividends are taxed changed significantly with effect from 6th April 2016 however many people are still unaware of these changes and how they may affect their income tax position.

Prior to 6th April 2016, dividends were treated as having been paid net of a notional 10% tax credit. Where the dividend income fell within an individual’s basic rate band for tax purposes no additional liability arose. For dividend income falling within the higher rate band or subject to the additional rate of tax, additional tax liabilities arose at the effective rates of 25% and 30.55% respectively.

With effect from 6th April 2016, the tax credit system was abolished and UK dividends are treated as if they have been paid gross. A £5000 dividend allowance was introduced and, where the individual’s dividend income falls within this allowance, no tax liability arises. Dividend income within this allowance does however still count as part of the individual’s income for the basic rate and higher rate tax bands and can therefore push other income into a higher tax bracket. The effective rate of tax applicable to dividend income exceeding the dividend allowance rose to 7.5% for dividend income falling within the basic rate band, 32.5% for dividend income falling within the higher rate band and 38.1% for dividend income subject to the additional rate of tax.

In light of the changes to the taxation of dividend income, business owners who operate their business through a limited company should give some consideration to the methods used to extract profits from the company and the structure of the business going forward as the current strategies and structure may no longer be tax efficient. In terms of profit extraction, a combination of extraction methods may be appropriate such as salaries, dividends, the payment of interest in respect of funds owed to the owner by the company and the payment of company pension contributions. In instances where the benefit of operating through a company is now only marginal, some business owners may wish to consider disincorporation or winding up their company. 

Rennie Welch LLP accepts no liability on the basis of this article and detailed advice should be sought based on specific circumstances. If you require advice or assistance in connection with this or any other taxation matter, please contact Lynn Miller at Rennie Welch on 01573 224391 or by email at lynn.miller@renniewelch.co.uk