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A Major Change in the Taxation of Dividends

The 2015 Budget announced significant changes to the taxation of dividends. These will come in from 6th April 2016.

At present, dividends are not subject to an additional charge to tax if they fall within the recipient's basic rate band. From 6 April 2016, dividends in excess of £5,000 will be taxed at an additional rate of 7.5%. So, for a basic rate taxpayer, dividends will be charged at 7.5%; for a 40% payer the rate will be 32.5%, and for those paying tax at the top rate of 45%, the rate for dividends will be 38.1%.

Although the first £5,000 is not taxed, this "dividend allowance" does not reduce taxable income, but is regarded as a nil-rate band applicable only to dividends. Furthermore, the new savings allowance of £5,000 is not available against dividends, only interest and the like.

The good news for higher-rate taxpayers with dividend income of less than around £22,000 is that you will be slightly better off, due in large part to the £5,000 dividend allowance. Everyone else is likely to lose out. If you draw remuneration through a company and take dividends rather than remuneration, you are almost certain to be worse off.

As an example, an individual drawing a salary of £8,000 and taking dividends of £40,000 will pay almost £1,500 more in tax. This additional cost increases as earnings increase to the point where, at total earnings of £100,000, the additional tax will be almost £4,000.

Anyone concerned about this new charge should talk to us about the various options that might be available to mitigate this additional tax, if possible.

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