{"id":2143,"date":"2015-09-23T11:04:52","date_gmt":"2015-09-23T11:04:52","guid":{"rendered":"http:\/\/my-brains.co.uk\/jackross\/?p=2143"},"modified":"2015-09-23T11:05:52","modified_gmt":"2015-09-23T11:05:52","slug":"understanding-dividends","status":"publish","type":"post","link":"https:\/\/my-brains.co.uk\/jackross\/understanding-dividends\/","title":{"rendered":"Understanding dividends"},"content":{"rendered":"

The chancellor George Osborne wasn\u2019t exaggerating when he said he was undertaking a \u201cmajor and long overdue reform to simplify the taxation of dividends\u201d in his Summer Budget speech.<\/p>\n

The current dividend system was set up more than 40 years ago to avoid double taxation of profits. At the time, corporation tax was more than 50% which meant that some individuals saw an 80% tax on their dividends.<\/p>\n

Today corporation tax is 20% (and due to fall to 18% from April 2020) but the taxation of dividends has remained unchanged. This has provided owner-managed businesses with financial incentives to incorporate and extract profits as dividends. Osborne said the government cannot reduce corporation tax further while there are \u201crapidly growing opportunities for tax planning\u201d.<\/p>\n

So the \u201ccomplex and archaic system\u201d of tax dividends will be overhauled in April 2016 with \u2018a simplified structure and different tax rates. The final rules are still subject to legislation but HMRC released a factsheet of how it envisages the rules will apply on 17 August 2015. The examples in this article are based on the details from the factsheet.<\/p>\n

Changes at a glance<\/h3>\n

There are 4 main changes that will come into \u00a0effect from April 2016.<\/p>\n

    \n
  1. The 10% dividend tax credit will be\u00a0abolished.<\/li>\n
  2. Individuals will have a \u00a35,000 a year tax-free dividend tax allowance. This allowance will not reduce total income for tax purposes and will only apply to dividend income.<\/li>\n
  3. Dividend income exceeding the annual allowance will be taxed according to an\u00a0individual\u2019s income tax band. Basic rate taxpayers will pay 7.5%, higher rate 32.5% and additional rate 38.1%.<\/li>\n
  4. No tax will be deducted at source; it will be\u00a0paid through self-assessment.<\/li>\n<\/ol>\n

    Dividends paid within pensions funds and those\u00a0received in shares from ISAs will stay tax-free.
    \nThe \u00a31,000 savings allowance (\u00a3500 for\u00a0higher rate taxpayers) due to come into effect in April 2016 excludes dividend income.<\/p>\n

    Who will be affected?<\/h3>\n

    The government predicts that 85% of people will pay the same or less tax under the new rules. The other 15% are likely to be basic rate or non taxpayers who receive dividends exceeding \u00a35,000 a year. This could be a business owner who receives an annual salary below the personal allowance and takes the rest of their remuneration in dividends.<\/p>\n

    Investors would need a portfolio of more than \u00a3140,000 with a 3.5% annual yield to exceed the \u00a35,000 annual allowance.<\/p>\n

    Current rules<\/h3>\n

    Dividends are paid as though 10% tax has already been deducted. This 10% is called a dividend tax credit and is equal to a ninth of the dividend. For example, a \u00a390 dividend has a \u00a310 dividend tax credit attached to it. For basic rate taxpayers, the 10% tax is deemed sufficient and there is no more tax to pay.<\/p>\n

    For higher and additional rate taxpayers the dividend and the dividend tax credit are added together and this figure is taxed according to an individual\u2019s income tax band at the following rates:<\/p>\n