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2016 Finance Bill


Publication of draft clauses – income from dividends

 The government has today published in draft form some of the legislation that is to be included in the 2016 Finance Bill.

 The legislation and supporting notes confirm that the new rules regarding the taxation of dividend income from 6 April 2016 will be brought in as expected, which will have an impact on a large number of taxpayers.

 From 6 April 2016 the tax credit that is attached to dividends at present will be abolished, meaning that the dividend actually received will be treated as a gross amount subject to income tax.  The first £5,000 of dividends received by any individual during a tax year will not be taxed.

 For amounts in excess of £5,000 there are 3 new tax rates that will apply, which are 7.5% for a basic rate taxpayer (normally 20%), 32.5% for a higher rate taxpayer (normally 40%) and 38.1% for an additional rate taxpayer (normally 45%).

For basic rate taxpayers who do not currently have to pay any tax at all on dividends that they receive, any dividend income in excess of £5,000 will result in an increased tax liability.

 For higher rate taxpayers, the point at which they are worse off under the new rules is on dividend income of £21,667. The reason for this is that although the effective tax charge on the net dividend received is increasing from 25% to 32.5%, they benefit from the fact that the first £5,000 of dividend income is tax-free. For additional rate taxpayers, the point at which they become worse off is on dividend income of £25,250.  

For the vast majority of people who receive dividend income from shares in quoted companies, they will be no worse off under the new rules as their dividend income is below the £5,000 tax free limit. In fact, to receive more than £5,000 in dividend income requires shareholdings worth around £125,000 assuming the average dividend yield is 4%, which is the current level on shares in the FTSE 100 index. To receive more than £21,667 of dividend income assuming the same 4% yield requires a portfolio valued at more than £540,000.

 For those who receive their dividends as part of their income from a company in which they are a director shareholder, the question arises as to whether or not they are still better off with a low salary and high dividends, or whether some alternative strategy should be pursued. The answer to that question is that they should continue to do the same, because there is still an overall benefit, albeit smaller than it is under the current rules.

Contact us today to find out more.

Mike Wakeford, Tax Partner 01243 520618
[email protected]