Ask the experts
We answer your financial queries
Q: My annual income is £52,000 derived from dividends – am I affected by upcoming dividend tax changes?
A: Currently, a notional tax credit of 10 per cent is applied to all dividend income you receive. From 1 April 2016, this will be abolished in favour of a new tax-free annual allowance of £5,000 on dividend income.
From 1 April 2016, you will pay income tax on all dividend income you receive over the annual allowance of £5,000. New rates of tax will apply to dividends: 7.5 per cent for the basic rate bracket, 32.5 per cent for the higher rate bracket and 38.1 per cent for the additional rate bracket. Your disclosed income appears to push you into the higher rate bracket. Therefore, it is likely that you will pay more tax on dividends under the new regime. No tax will be deducted at source. You should complete the self-assessment process to pay any tax due.
You have not indicated the source of your dividend income. One of the main motivators behind these changes is not to target individuals receiving dividends from public companies, but rather to discourage private companies from paying employee shareholders by way of dividends in lieu of salary. If your dividend income is generated from shares in a private company, you must ensure that income is distributed tax efficiently.
Otherwise, you should consider re-organising your assets. ISA reliefs remain unchanged and shares in public companies could be held in an ISA wrapper. If you have a spouse or civil partner who pays tax at a lower rate, you could reduce your combined taxable income by transferring shares to your spouse or civil partner. This would also utilise both of your annual dividend allowances.
Dividend tax planning is more important than ever before. Advice should be taken prior to the introduction of these changes.