During July 2015 the first all Conservative government for many years presented their first budget. I am sure accountants all over the country are still recovering from the shock of many of the announcements.
The revised taxation of dividends was hidden away in the budget, but it certainly has made one of the biggest impressions on accountants and their clients. Only days before I was suggesting the benefits of incorporating sole traders to limited companies so that they could benefit from receiving tax free dividends as a basic rate taxpayer and reduced dividends for higher rate tax payers.
However, not only will business owners suffer from this change, but also taxpayers with large portfolios of shares who could also find themselves paying tax on dividends received.
As of April 2016, the first £5,000 of dividend income received will be tax free. Dividend income received by basic rate tax payers will be taxed at 7.5% and higher rate tax payers will pay 32.5%. Taxpayers who receive income in excess of £150,000 will pay 38.1% tax on dividends.
In addition to the dividend allowance of £5,000 tax payers will receive a personal allowance of £11,000 in the tax year.
So how might you be taxed in the 2016/2017 tax year?
Helen receives a salary of £10,000 and dividend income of £3,000 – as the salary is less than the personal allowance there is no tax to pay. The dividend income is covered by the dividend allowance and therefore no tax is due.
Paul receives a salary of £15,000 and dividend income of £6,000 – tax is due on the salary of £800 (£15,000 less Personal Allowance £11,000 taxed at 20%) tax is due on the dividend income of £75 (£6,000 less Dividend Allowance £5,000 taxed at 7.5%).
James receives a salary of £50,000 and dividend income of £10,000 – tax is due on the salary of £9,200 (£50,000 less Personal Allowance £1,1000 = £39,000, £32,000 is taxed at basic rate 20% and the balance of £7,000 is taxed at higher rate 40%) tax is due on the dividend income of £1,625 (£10,000 less Dividend Allowance £5,000 taxed at 32.5% as he is a higher rate tax payer).
As a result of the new legislation, it is very apparent that taxpayers receiving dividend income will see an increase in their personal tax liabilities from the next tax year.
If you would like to discuss how the taxation of dividends will affect you please do not hesitate to call on 01442 828006 or email email@example.com.