The Chancellor in today’s budget announced a change in the way that dividends received by company shareholders are to be taxed.
Dividends have up to now carried a tax credit of 10% and this credit is now to be abolished. Mr Osborne was very careful about how he did this, getting in a dig at Gordon Brown who removed the tax credit for pension schemes in 1998 the effect of which is still resented to this day.
Currently, dividends received by individuals are treated as having suffered tax at the lower dividend rate of 10%. Therefore no additional tax is payable on those dividends where the taxpayer is a basic rate taxpayer. For higher rate taxpayers the effective rate is 25% and additional rate taxpayers 30.6%.
What are the new rules?
From 5 April 2016 the first £5,000 of such dividends will be tax free in the hands of the shareholder. Above that amount dividends will be subject to tax at various rates as follows:
Basic rate taxpayers
Higher rate taxpayers
Additional rate taxpayers
It is clear that where someone receives significant amounts of dividends above the £5,000 allowance the tax burden will increase next year compared with the position this year, despite the Chancellor’s seemingly reassuring words that 85% of taxpayers will pay less tax after the changes.
What’s the impact?
This measure will affect those owner managed businesses where dividends have been used to remunerate business owners. In the light of this change reconsideration of the structure of owners pay and benefits may be required.
For further detail and advice on how this may impact your business the team at Francis Clark will be pleased to help.