UK: Summer Finance Bill 2015 Changes To The Personal Tax On Dividends

Last Updated: 24 September 2015
Article by Smith & Williamson

On 8 July 2015, the UK Chancellor of the Exchequer, George Osborne, announced the withdrawal of the dividend tax credit and an increase in dividend income tax rates for 2016/17.   The changes effectively mean a 7.5% increase in the marginal rate of tax on dividends in 2016/17 compared to 2015/16, whatever the income tax band (ignoring the personal allowance and dividend allowance and the differences between the basic rate income tax bands year to year).

From April 2016 there will be a dividend allowance that will tax at 0% the first £5,000 of dividend income a year.  The dividend tax credit will be abolished at the same time.

Note that the £5,000 0% dividend band counts towards total income – it is not an exemption and the tax relief will not alter the incidence of the high income child benefit charge, nor the withdrawal of personal allowances, nor the future impact of restriction of interest deductions for property businesses, where total income is at a level where those factors are relevant.

Currently, a 10% notional tax credit attaches to a dividend paid by UK and some non-UK companies.   This reduces the effective rate of income tax on the dividend to 0% at the basic rate, 25% at the higher rate and 30.56% at the additional rate.   From April 2016, dividend income in excess of the £5,000 allowance will be taxed at 7.5% for basic rate, 32.5% for the higher rate and 38.1% for the additional rate taxpayers.

Here are some examples of the impact on individual taxpayers at different levels of income:

  • ignoring personal allowances, a basic rate taxpayer will not pay more tax on dividends in 2016/17 than in 2015/16 if the net value of dividends received does not exceed £5,000;
  • someone who only receives actual dividend income, of £38,146 would be treated as receiving gross dividends of £42,385 in 2015/16 and pay no additional tax.  This is because of personal allowances and the dividend tax credit franking any tax due on dividend income within the basic rate band.   An equivalent dividend receipt of £38,146 in 2016/17 would result in further tax of £1,661;
  • a higher rate taxpayer will not pay more tax on dividends in 2016/17 than in 2015/16 if the net value of dividends received does not exceed £21,667;
  • an additional taxpayer will not pay more tax on dividends in 2016/17 than in 2015/16 if the net value of dividends received does not exceed £25,265;
  • in 2015/16 extracting funds via dividends incurs less tax and NI than operating through self – employment.  In 2016/17 the benefit is marginal or favours self- employment for profit levels of more than £150,000.

Most basic rate taxpayers have dividend income of less than £5,000 and will not be worse off.  The graph below demonstrates that those with dividend income over £5,000 will be the big losers from these changes – for simplicity the graph ignores the HICBC and the loss of personal allowance.

As well as those with large investment portfolios, those with low non-dividend income, such as pensioners with a small pension but with a reasonable amount invested in shares could be adversely affected, this could happen, say, where the pensioner has inherited a portfolio or has moved into nursing care and invested house sale proceeds to pay for nursing care costs.

The impact of these changes on basic, higher and additional rate taxpayers with additional dividend income is indicated by the graph below:

Strategies for minimising the impact of the increased rate of tax on dividend income over £5,000 include:

  • transferring wealth into an ISA;
  • transferring investments to a spouse to give a sufficient portion of the investment portfolio to use up the £5,000 nil% dividend allowance; or
  • switching to investments that generate capital returns.

This note does not provide any investment advice.  You may wish to take investment advice from us before any change in investment strategy as dividend tax will not be your only consideration.

We  have  taken  care  to  ensure  the  accuracy  of  this  publication,  which  is  based  on  material  in  the  public  domain  at  the  time  of  issue.  However,  the  publication  is written  in  general  terms  for  information  purposes  only  and  in  no  way  constitutes  specific  advice.  You  are  strongly  recommended  to  seek  specific  advice  before taking  any  action  in  relation  to  the  matters  referred  to  in  this  publication.  No  responsibility  can  be  taken  for  any  errors  contained  in  the  publication  or  for  any  loss arising  from  action  taken  or  refrained  from  on  the  basis  of  this  publication  or  its  contents.  ©  Smith  &  Williamson  Holdings  Limited  2015

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