Changes to the taxation of dividends
The 2015 summer budget contained changes to the taxation of dividends. From the 6th April 2016 the tax credit applied to dividends will be replaced with a tax free allowance for dividends of £5,000 per annum.
For dividends above that allowance, the rate of tax will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate tax payers.
The changes mean that many of those receiving in excess of £5,000 dividend income may find their tax charge increases. Conversely, if you are a higher rate taxpayer and only receive modest amounts of dividend, your position may well improve.
For controlling shareholders in companies where there is a choice of how to extract profits, it is still more tax efficient to use dividends rather than drawing a salary. However, there may be other viable alternatives such as rent or interest on director’s loan accounts.
Another option to consider is accelerating the rate at which dividends are paid before the changes come into force on the 6th April 2016.
If you are a client of WMT, we will review your position taking account of your own particular set of circumstances. We will be in contact before the end of the tax year to advise you of any recommended changes to your remuneration approach. If you would like us to review your position sooner, please contact your usual WMT partner or tax team member.
For help and advice on remuneration planning please contact Anne-Maree Dunn.