Who
will be affected?
HMRC haven’t yet published details of how this
will work in practice, but summarised below is how it may work. In particular,
it is not clear whether the £5,000 dividend allowance will extend or be within
the basic rate band.
Among basic rate taxpayers, there
aren't any winners; they will either pay the same amount of tax – none – or more
under the new rules. The calculation is pretty simple; if you receive more than
£5,000 in dividends in a year outside pensions and ISAs, and you've already used
up your personal allowance, you'll pay more tax.
With higher
rate taxpayers, it gets more complicated. Within this group, some will
pay less tax under the new system than the old. Any higher rate taxpayer earning
less than £5,000 a year from dividends is an obvious winner, as they will pay no
tax on that income under the new system, whereas they would have paid 25%
previously. So someone earning £5,000 exactly will save £1,250. However, the
higher percentages of tax will hit on dividend levels above
£5,000.
So there’s no simple answer; it just depends on an
individual’s income mix.
What is very clear, however, is that this
measure will significantly affect small companies who pay a small salary and
larger dividends, which has been a feature of remuneration planning for small
business for many years because of the savings in National
Insurance.
How to move forward?
As yet it is not clear
how these new measures will work in practice. Until it is fully understood, we
will stick with the original planning this year, with the new rules in mind and
look to extract as much as possible in dividends in the current year before they
come into place in April 2016. By then I will have a better understanding of the
best way to move forward for all.
If you have any questions/concerns,
please contact me.
Debbie Needham
DN Accounting Solutions