For investors, the most notable change in the post-election ‘Summer Budget’ was arguably the scrapping of the existing dividend tax credit regime. Under the current system, dividends are paid with a notional 10% tax credit, meaning non- and basic-rate taxpayers have no further liability.
From April 2016 the tax credit will be replaced by a £5,000 tax-free dividend allowance for all taxpayers. Above that, investors will pay tax at 7.5%, 32.5% or 38.1%, depending on their marginal rate of tax.
For clients who receive dividends of less than £5,000 per annum there is no change. In fact, for those higher rate tax payers with dividends below this level, there is a significant tax saving.
However for anyone receiving more than £5,000 dividends each year, including dividends from both investments and privately owned companies, there is an increased tax liability.
The end result of these changes is that everyone needs to review their financial situation.
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Company owners need to maximize dividends before April and consider whether swapping dividends for salary afterwards would reduce any tax bill.
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Investors need to consider how to ring-fence investments in tax wrappers such as ISAs or Pensions, and explore whether to create dividends to utilise the £5,000 annual allowance.
As always Platinum are happy to discuss things further and answer any of your questions. Please do not hesitate to contact us.