New Dividend Tax – What is it, and how can you avoid it?
During last July’s Budget announcement, George Osborne unveiled a new dividend tax that will apply to many people currently receiving dividends from company schemes. The dividend taxes are set to come into effect in April of 2016, and as the date draws nearer, investors are scrambling to ensure that their funds will be safe from taxes and unnecessary fees. Who is vulnerable to this tax? How can you avoid having your own dividends taxed? Read ahead in order to learn more about this important new financial change.
What is the current dividend tax (prior to April 2016)?
Under the current system, those who are taxed at the basic rate are already treated as ‘taxed within the corporate tax system,’ and this means that they do not necessarily have to pay any further tax. Currently, no matter how high the dividends are, there will be no additional tax due (as long as the individuals total income remains within the basic rate tax band) – this has been the system for decades, and many people rely on this policy, believing it would be the permanent norm.
Changes coming into effect in April 2016
Under the new system, only the first £5,000 of dividend income will be exempt from tax, a huge change that is sure to send ripples across the entire financial system. For dividends above this threshold, those taxed at the basic rate will be subject to a 7.5 % tax, while higher rate taxpayers will be charged 32.5 % (an increase from 25%). Any persons paying the additional rate will pay 38.1 %, vs. their old rate of 30.56 %. That said, there may be a small benefit to those in these higher tax bracket – while they currently pay 25% on dividends up to £5000 (£1250), they will now pay nothing if they do not exceed this number.
As you can see, these new rates (some even approaching 40 %!) will have a dramatic effect on many people across the United Kingdom. It is important to note that while these rates are far below current income tax rates, many people will end up paying more overall than they have before. Some critics of this new policy are even going so far as to say that this is a ‘simple case of double taxation.’
How to avoid paying the new dividend tax
If you run your own Limited Company then careful structuring of your dividend payments will may assist in minimising the additional tax liability – certainly maximizing dividend distributions prior to 6 April 2016 will help. However for many business owners there will be no escaping this additional liability.
If your personal income is supplemented by dividends on investment holdings, then it may be an opportune time to review your investment portfolio to ensure it is still tax efficient.
For the foreseeable future the Dividend Tax is probably here to stay, will the limit increase, decrease or stay the same is the question!