As announced in the Summer Budget, from April 2016 the dividend tax credit will be abolished and replaced by a new tax-free dividend allowance. The allowance will enable individuals to receive dividend income of £5,000 tax-free regardless of your other income.
Dividend income in excess of £5,000 will be liable to tax at the headline rates of 7.5 percent (basic), 32.5 percent (higher) and 38.1 percent (additional).
Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an Individual Savings Account, are unaffected by the change. The chancellor expects this measure to generate additional tax receipts of £2.5 billion in the 12 months following its introduction in April 2016. Clearly, the measure will impact most significantly on those who will – or can elect to – receive dividend income, including many self-employed business owners.
Sink or swim?
The new regime brings with it potential tax saving planning opportunities and considerations, remembering also the limits and rates that will apply from April 2016:
- Personal allowance: £11,000
- Basic rate limit: £32,000
- Higher rate threshold: £43,000
Given this sea change, maximising the use of all available allowances is essential – including ISAs at £15,240 per person (2016/17), a limit that is proposed to increase to £20,000 per person in April 2017; along with the introduction of the new ‘Lifetime ISA’ for those aged under 40. Consider properly utilising the new tax-free dividend allowance so more of your investment and company income falls within the tax-free £5,000.
If you are married, assess your individual holdings to determine whether it would be beneficial to transfer assets to your spouse. It’s helpful to note that transfers between spouses are exempt from Capital Gains Tax, also interestingly CGT rates from April will be reduced from 28 percent to 20 percent for higher rate taxpayers and from 18 percent to 10 percent for basic rate tax payers. However, be careful of murky waters; the reduction may not apply to gains made on the sale of residential property.
Pension contributions are a vital consideration more than ever for many; currently offering some of the best tax reliefs and savings available, although a further raft of changes on the horizon is set to limit pension contributions for higher earners (over £150,000), tapering the amount they can contribute on a sliding scale from £40,000 back to £10,000. Given however, the additional possible costs of withdrawing company funds via the dividend method going forward, pensions are still worthy of attention. Other potential pension changes expected in this Budget have not materialised, but further amendments in future Budgets are always possible, so the best use of current tools – whilst available – should be given consideration.
As George Osborne said in his Budget speech: ‘The UK economy is strong but the storm clouds are gathering again.’ All in all, with some changeable economic weather and shifting tax winds ahead, careful navigation and planning will be required for profitable expeditions in 2016.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.