The new tax on dividends – In a nutshell, expert advice from Colette DinnesClick here to view the transcript
From the 6th of April 2016, part of this advantage will be lost and taxpayers who receive a significant part of their income in the form of dividends will suffer a tax increase.
At the moment, there is no income tax to pay on dividends received in your basic rate band. Higher rate taxes are payable on dividends once your income increases above approximately £43000 currently at 25% of the amount received.
If your income is above £15000, then the additional rate tax payable on these dividends is at 30.65%.
From the 6th of April 2016 this will change. There will be a new Dividend Tax Free Allowance of £5000, and then Dividends will be taxed at 7.5% in the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band.
Let me give you a simple example to illustrate these changes. If you receive a salary of £8000 and dividends of £80000 then this will result in an increased tax bill of more than £4000.
These changes will have a long term impact on the decision whether you run your business through a company or not.
As always – care should be taken to review your tax position as a whole.