Dividend tax changes – winners and losers

Dividend tax changes – winners and losers

The unexpected change to dividend tax announced in the Summer Budget will create winners and losers from April 2016.

From April 2016 after the first £5,000 of dividend income is covered by the new Dividend Tax Allowance, dividends will be liable to tax at 7.5% in the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band.  Therefore, in broad terms, taxpayers will be worse off if they receive taxable dividend income of more than:

  • £5,000 for basic rate taxpayers
  • £21,667 for higher rate taxpayers
  • £25,250 for additional rate taxpayers

Many higher rate and additional rate taxpayers will be better off under this new regime.  For example for a higher rate taxpayer with an equity portfolio with an average yield of 3.5%, their portfolio (excluding ISAs) would need to be worth over £600,000 for them to be worse off under the new regime.

 Potential action points are:

  • Consider how equity portfolios are structured between personal holding, ISA and SIPP (if applicable), to look for greater capital growth in personal portfolios and greater income in ISA and SIPP portfolios.
  • For higher rate and additional rate taxpayers receiving dividend income in excess of the above figures, there may be an advantage to advancing the income into 2015/16, if possible.
  • Similarly, where a basic rate taxpayer won’t use their full basic rate band in 2015/16, it should be advantageous to advance dividend income to use up their basic rate band.

The changes will penalise those who have personal or family companies where income is taken as dividends rather than salary and it is likely that one reason for the introduction of the new dividend tax is to discourage the tax motivated incorporation of smaller traders.

For trusts/settlements, the position will be more complex, as it is likely that the Dividend Tax Allowance will be split equally between trusts created by the same settlor and:

  • For an interest in possession trust, this may well increase the tax effectively paid by the life tenant (unless the dividend tax paid by the trust can be reclaimed by the life tenant).
  • For a discretionary trust with a full Dividend Tax Allowance, the tax position will be as for an additional rate taxpayer.  However, as all tax paid by the trust should be added to the “tax pool”, the ability to distribute taxed income to beneficiaries should be enhanced.

The above is a simplified approach, as the position for individual taxpayers will be dependent upon precisely how the 7.5% dividend tax charge, abolition of the 10% dividend tax credit and £5,000 Dividend Tax Allowance interact with other allowances and reliefs.  Limited detail is currently available since draft legislation has not yet been issued and no technical guidance has been provided by HMRC.

If you have any queries, please contact your usual consultant or Caroline Lovibond on 01865 261100 ([email protected])

5 August 2015