It’s early March and spring is in the air. The spring flowers are coming out into bloom – our garden is filled with snowdrops and daffodils. But then again last week we couldn’t see them because of snow! The start of spring though means not just the end of winter but also the end of one tax year and the start of another. This year, on the 6th April, though brings with it the start of a brand new tax – the dividend tax.
You may have seen lots of hype, but just what is it all about. For many of you David or I will already have had a chat, but we wanted to put a few thoughts down on paper for you!
Let’s have a brief look at what it’s all about.
What are the changes?
Change 1 –Grossing up of dividends is scrapped (believe it or not this little change is good news)
Currently all net dividends (this is same as the cash you receive) are grossed up by 100/90 before they are taxed. The 10% difference is a tax credit which is added to reflect the fact that the company paying the dividend has already paid corporation tax. Don’t worry if you don’t get this what it really means for most of us is that this ‘adjustment’ has the effect of reducing how much in terms of dividends taxpayers can really earn before they go into a higher tax band.
So for many company shareholder/directors the scrapping of this rule is good news as it
- Removes an area of tax which many tax payers find confusing as they grapple with gross and net dividends.
- It increases how much cash dividends they can take before they fall into a higher tax band.
Change 2 – Dividend Tax (This is the bad news for most Small & Micro business owner’s)
This new tax is applied to dividend income received in a year which is more than £5,000. The two groups of taxpayers who will be affected and therefore pay more tax in 2016/17 than they did in 2015/16 are:-
- Company directors who take a modest a salary and the rest of their income as dividends
- Taxpayers who have sizeable share portfolios which generate sizeable amounts of income
And when is an allowance not really an allowance?
Everyone will be entitled to a £5,000 tax free dividend allowance. This sounds very generous – after all its tax free. Well it’s not generous and that’s because it’s not really an allowance it’s a new 0% tax band has been created. The net result, is that it reduces a taxpayer’s basic rate tax band.
How much more tax could I pay?
Let’s have a look at the numbers (well I am an Accountant). This should make it easier to understand how the changes are likely to affect you!
The following table summarises the extra income tax which will be payable next year (2016/17) compared to this year (2015/16). Or put in simple terms for any Dividends you take from 6th April 2016 onwards!
|Cash Dividend||2015/16 Tax||2016/17 Tax||Increase|
The dividend tax is particularly punitive for the many family owned businesses where both the shares and income is split between both the husband and wife. In these cases the tax increases (as shown above) are doubled. So now coupled with increased operating costs in your business as a result of Auto Enrolment and the National Living Wage you can see why I am concerned that this is all too much for many small business owners. 2016 is the year of going backwards for many business owners’ in terms of PROFITABILITY unless they act now!
When will I be paying the extra tax for 2016/17?
Under the usual self-assessment rules then this extra tax would be payable in one lump sum payment by 31/1/2018. That gives taxpayers time to put some money aside each month and can budget accordingly.
It appears though that HMRC doesn’t want to wait that long for the extra tax. We understand that HMRC is in the process of amending tax codes for many company directors so that the lower ‘new’ code reflects the estimated amount of tax due on dividend income.
If you are a taxpayer where cashflow is challenging then this change will be bad news as you will be required an extra monthly tax payment to HMRC potentially as early as May this year. This doesn’t give much time to plan and budget.
How will it work?
Every taxpayer is notified of their tax code via a P2 (PAYE coding notice) and those affected the estimated amount of dividend tax will be shown within the notes.
Tip: If you get one of these tax coding notices it’s advisable to check the figures – an incorrect tax code could mean you unwittingly pay way too much or too little tax.
If you are unsure that the code is correct get in touch with your accountant.
What Can I do?
Everyone’s situation is different which I’m afraid mean the possible tax saving options that are available will also be different. That said here are a few ideas:-
Maximise the annual tax free dividend allowance
Everyone is entitled to the new £5,000 allowance. Married couples can spread their share portfolios in order to spread their dividend income and thereby use the whole of their allowance.
Use an ISA
ISA dividends are tax free and will be not be subject to the new dividend tax. You can transfer up to £15,240 worth of shares and investments into ISAs this year.
Maximise a spouse’s income tax allowance and tax band
Married couples should use the whole of their personal allowances and basic rate tax bands, where applicable, so that any dividends that paid to the spouse who pays the lowest rate of tax.
Invest in VCTs
VCT (Venture Capital Trust) are for taxpayers who are willing to take higher risks. Exactly like ISAs VCTs will give a taxpayer tax free dividends. Also like ISAs when the investment is sold the gain or profit is also tax free as it’s not subject to Capital Gains Tax.
Kim KMA Accountancy
This article is for general information only and no action should be taken, or refrained from, as a result of this information. Professional advice should be taken based on specific circumstances in each individual case. Whilst we endeavor to ensure that the information contained in this article is correct, no liability will be accepted by KMA Accountancy for damages of any kind arising from the contents of this communication, or for any action or decision taken as a result of using any such information.