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Dividend tax changes – Should you take more income before 6 April 2016?

warning here: we have no draft legislation yet  –  just some explanatory notes issued by the Treasury and HMRC.  However, based on those notes…

At the moment, in arriving at the amount of your taxable dividend income, you have to gross up the cash you receive as if it were the 90% which would be left after deduction of 10% tax at source.  You can then deduct this 10% “tax credit” from your tax bill.  The only effect of this (apart from massive complication!) is that you will pay higher rate and additional rate income at slightly lower income levels than would otherwise have been the case.  This grossing up and tax credit system is to be abolishedSo that’s good!

From 6 April 2016, the first £5,000 of your dividend income will be tax freeAgain, that’s good!

On the “bad” side, the rates of tax on dividend income are to go up by 7.5%:

  • On the slice falling within your basic rate band (currently the first £31,785 of income not covered by the £10,600 personal allowance), £5,000 will be taxed at zero % and the balance at 7.5% (currently nil).
  • On income falling within the higher rate band (currently taxable income from £31,786 to £150,000) – 32.5% (instead of the current 25% of the cash dividend received, before grossing up).
  • On income charged at the additional rate (currently taxable income over £150,000) – 38.1% (instead of the current 30.55% of the cash dividend received, before grossing up).

On the face of it, then, tax on dividend income is going up, across the board.

Does this mean that you should, if you can, take extra dividend income before 6 April 2016 to beat the increase?

We have done some number crunching…  a lot of number crunching…!  We don’t have space in an article of this size to give all the details.  What we can say is that, in every tax band (basic, higher, and additional), some people will benefit by taking extra dividends now, but others will end up paying more tax overall.

It all depends on your exact circumstances!

Some of the things which will affect the outcome are:-

  • How big is your total dividend income, relative to the £5,000 allowance?
  • How big is your non-dividend income?
  • Do you receive child benefit?
  • Would extra dividend take your total income above the £100,000 threshold at which your tax personal allowance will start to be eroded away?

If you would like us to look at your own personal circumstances with you, and help you arrive at the best decision, call us on 01908 674484 and speak to your usual contact, or ask to speak to Kathy Smith or Malcolm Bannister.

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