From 6 April 2016, the 10% Dividend Tax Credit is being scrapped and will be replaced by a new Dividend Allowance of £5,000. This means the first £5,000 of any dividends will be tax-free for all investors, except trustees, with any amount over this being charged at different rates. These are 7.5% for basic rate taxpayers; 32.5% for higher rate taxpayers; and 38.1% for additional rate taxpayers.
Better or worse off?
Generally, this means no change in tax for basic rate taxpayers with dividends below £5,000. Higher rate and additional rate taxpayers stand to gain though, as they will pay £1,250 and £1,530 less tax respectively on dividends up to the allowance. Trustees of discretionary trusts will be worse off.
For dividends above £5k, basic rate taxpayers are worse off from £5,001, higher rate taxpayers are worse off from £21,667, and additional rate taxpayers are worse off from £25,250.
What advice might clients need?
For business owner clients
- Consider boosting dividend payments this tax year or bringing forward any dividend that may otherwise be paid after 6 April 2016.
- Ensure shares go into the right hands – paying them to a spouse or civil partner will mean they can use their dividend allowance too.
- Reconsider whether NI savings still mean that the client paying themselves dividends is the best option.
- Make a pension contribution to extend basic rate tax band.
For clients investing in funds taxed as dividends
- Remember that both ACC and INC units are subject to dividend tax.
- Spread portfolios between married couples and civil partners to maximise dividend allowances, CGT exemptions, personal allowances, and basic rate tax bands.
- Shelter investments in an ISA or SIPP where dividend allowances are fully used, or for funds with the highest yields and use the dividend allowance for funds with lower yields or VCTs for tax-free dividends.
- Maximise pension contributions to extend the basic rate tax band.
- Reduce other income by sheltering/transferring assets into alternative tax wrappers, or deferring drawdown payments.
- Use Personal Savings Allowance for funds taxed as interest.
- Review mixed/multi-asset funds to see if taxed as dividends or interest.
- Use growth funds (with no/low yield) to generate an income using withdrawals from capital gains (against CGT exemption).
- Use onshore investment bonds (particularly for trusts) where using funds taxed as dividends or to shelter income/defer taxation.