The first of a five part series in which Rutton Viccajee guides you through the upcoming changes regarding taxation of dividends.
The apparent bombshell announcement in the July 2015 Budget was regarding the taxation of dividends. For many investors this will not pose any issues. But for the owner manager of a small company, major changes are in store.
Overview of the raw rules
The basic information about the taxation of dividends is as follows, but inevitably, before the release of the Finance Bill, some details are a little sketchy – this is indicated where important.
• Abolition of the tax credit – dividend income will no longer be grossed up in the personal tax computation.
• A Dividend Tax Allowance of £5,000. It is not clear whether this will then reduce the available basic rate band or whether it is a full exemption from tax. The policy driver is likely to be to exclude the vast majority of ordinary investors from having to complete tax returns in respect of dividend income (even basic rate taxpayers), so logic tends to suggest that it will be in addition to the basic rate band to keep things simple for those not in SA.
• Dividends will then 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.
• This compares with existing rates of 0%, 25% and 30.56% on the net income.
• The new savings allowance of £5,000 introduced this year (2015) is not available against dividend income – only interest and similar.
• The new personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers which is due to commence in 2016 will probably not be available against dividends; it is likely to be restricted to savings income only. This will also be in the Finance Bill to be issued shortly.
But what does it all mean? Translation please!
Look out for part two, in which Rutton examines the impact on investors.