14 July 2015

Summer Budget 2015 - Dividend Taxation

This was not a change we saw coming! Dividends received on shares that you own outside of a tax wrapper like an ISA are currently received with a "tax credit" of 10%. That means that for basic rate taxpayers there is no further tax to pay (higher / additional rate taxpayers have more to pay).

From April 2016 that tax credit will be abolished and there will be a dividend tax allowance of £5,000 per year. New rates of tax will apply if you have dividend income over that - 7.5% for basic rate taxpayers, 32.5% / 38.1% for higher / additional rate taxpayers.

Whether an individual will be better or worse off will depend on the amount of dividends received. For investors, the Chancellor said that you would need more than £140,000 in shares (or funds) before being over the allowance. If income is needed there could be other ways of generating it more tax efficiently. But the key point must be to reinforce the good practice of protecting investments within a tax wrapper like an ISA as far as possible.

The bigger issue is for small companies where the business owners (often husband and wife) pay themselves a minimal salary but the bulk of their income comes as dividends. Dividend income between £5,000 and £43,000 (the new higher rate threshold) will be taxed at 7.5%, and 32.5% above £43,000. That negates the advantage of not having to pay National Insurance.

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