Over many years investors and small businesses have sought the payment of dividends from their investments and businesses as a means of extracting wealth in a tax efficient manner. From 6 April 2016, significant changes to the way dividends are taxed will mean that for those who have not considered the implications fully and potentially adjusted their planning, an increase in tax could be on the way.
For each individual, the first £5,000 of dividend income in each tax year will be tax-free. Dividend income above this level will be taxed at 7.5% for basic rate taxpayers and 32.5% for higher rate taxpayers.
The winners will be higher rate taxpayers with £5,000 or less of dividend income, which will now be tax-free rather than taxed at 32.5%. The losers will be smaller business owners who have tended to pay a greater proportion of their earnings as dividends within the basic rate tax band.
Action: Whilst it may not be possible to bring forward dividend payments, a strategy review for the future could ensure that the remuneration planning is as tax efficient as possible, under the new regime.
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