Are you ready for the new dividend tax?

Business owners and shareholders need to reassess their position on dividends ahead of changes to the way they are taxed next month.

At present there are considerable savings to be made in National Insurance contributions if a minimal amount is paid as salary and any balance of a remuneration package is paid as dividends.

From 6 April 2016, the way dividends are being taxed will change and the 10 per cent tax credit currently available to taxpayers will be abolished.

Instead, each individual will have available a flat rate dividend allowance of £5,000. Any dividends received in excess of this allowance will be taxed as follows:

• 7.5 per cent if dividend income is within the standard rate (20 per cent) band
• 32.5 per cent if dividend income is within the higher rate (40 per cent) band
• 38.1 per cent if dividend income is within the additional rate (45 per cent) band

These changes are likely to have a direct impact on the overall savings in NIC and income tax that can be achieved by those who receive dividends and some people may find it beneficial to reassess their remuneration policy.

Last week, the House of Lords Economic Affairs Committee said that HM Revenue & Customs (HMRC) had poorly communicated these changes and that the changes were complex and confusing to the majority of tax payers.

In light of this, we believe that some people may still be caught out by the changes and might end up paying more in tax than they need to.

Dividend recipients also need to be aware that HMRC have amended the tax codes of many owners, directors and shareholders to “code out” an estimated amount. The deduction in the PAYE code will be labelled ‘dividend tax’, as part of HMRC’s goal to move the payment of tax forward.

To work out whether the deduction for “dividend tax” is approximately correct the estimate for your total income tax liability for 2016/17 will need to be checked, including funds received through savings and investments.

Failing to get your PAYE code correct could have a significant effect on the amount of tax you pay in the following year, so ensuring that it is right is vital. Those who are unsure should seek professional assistance to help them with their dividend affairs.

If you would like help to make sense of the changes to dividends then our tax team at Ross Brooke can help. To find out more, please contact 01635 555 666 or cdavies@ross-brooke.co.uk .