Summer Budget: Changes to the taxation of Dividends

I wanted to write to you to highlight the significant changes to the taxation of dividends announced in the Summer Budget 2015.

Currently, dividends are paid with a notional 10% tax credit. As a result, basic rate taxpayers suffer no tax on dividend income, whilst for higher rate taxpayers the effective tax rate is 25% of the dividend receipt, rising to 30.56% for additional rate taxpayers.

The changes from 6 April 2016 will do away with the notional tax credit and taxpayers will now receive a £5,000 dividend tax allowance. However, dividend income in excess of this allowance will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1 % for additional rate taxpayers.

Taxpayers who receive dividends of £5,000 or less will pay no tax on their dividend income, regardless of their overall income levels. However, for most taxpayers the proposed changes will result in an additional tax burden, especially for those who receive most of their income in the form of dividends.

We will be addressing tax efficient income planning with you before these changes come into effect, however if you have any specific queries now please do not hesitate to contact us.