Dividends

There was an unexpected announcement within George Osborne’s budget; from April 2016 the way in which dividends are taxed is changing.  Currently gross dividends taken within the basic rate of tax are effectively tax free (taxed at 10% but with a 10% tax credit).  From April 2016 the first £5,000 of dividends will be tax free, then dividends will be taxed at 7.5% (up to the basic rate threshold), then 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. 

A further consequence of this is that director/shareholders that do not currently pay an income tax payment on account (as their tax liability from dividends and salary is less than £1,000 per annum) may be brought within payments on account from 2016/17 onwards, effectively front loading the point at which tax is paid.

The slightly more positive news is that under the new rules more dividends can be taken within the basic rate band, so in effect some dividends that would currently be taxed at the higher effective rate of 25% will be taxed at 7.5% under the new rules, reducing the effective tax rise for those taking dividends up to and exceeding the basic rate threshold.

The full detail still needs to be disclosed but it appears that many business owners who are paid via a small salary topped up with dividends, are likely to end up paying more tax. Once full details are disclosed full comparisons will be calculated.