Changes to taxation of dividends – are you ready?

If you are liable to pay income tax on dividend income you need to be prepared for the significant changes to the way dividends received are to be taxed from 6 April 2016.

After this date, the Dividend Tax Credit will be replaced by a new Dividend Allowance in the form of a 0% tax rate on the first £5,000 of dividend income per year.

What changes do I need to be aware of?

In summary:

- From 6th April 2016 the current 10% notational tax credit will be abolished

- In place of this there will be a dividend nil rate band; initially set at £5,000 (so most tax payers will not be liable to pay any additional income tax on the first £5,000 of dividends they receive)

- Any dividends received which exceed the £5,000 allowance will be subject to income tax at the following rates:

  • 7.5% on dividend income for the Basic rate taxpayer
  • 32.5% on dividend income for Higher rate taxpayer (40%)
  • 38.1% on dividend income for Additional rate taxpayer (45%)


What does this mean for me?

If you are a small business owner who chooses to take a small salary topped up by dividends then this represents a significant change for you. It is advisable to speak to your accountant about how to move forward but generally you will still be better off if you continue to take money out of your company as a dividend rather than a full salary.

How can I ensure I am prepared?

It is at times like these when employing a good accountant pays dividends – literally!  There are a few options available to soften the initial blow, such as paying yourself a large dividend before the 6 April cut off….any moves like this though are best to be taken under professional advice and if you have any questions at all about how the changes will affect you please do get in touch – we would be more than happy to help you.

About the Author

Leave a Comment

Messenger icon
Send message via your Messenger App