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Summer Budget – Proposed Changes to the Taxation of Dividends – Updated 17 August 2015
Significant changes were announced in the recent budget regarding the taxation of dividends. It is proposed that
these changes will be effective from 6 April 2016. The main points are summarised below:

The notional tax credit on dividends will be abolished. This means that dividends will no longer be
grossed up in tax computations.

A £5,000 tax free dividend allowance will be introduced.

The rate of Income Tax applying to dividends will increase as follows:
Basic rate
Higher rate
Additional rate
Currently*
0%
25%
30.56%
From 6 April 2016
7.5%
32.5%
38.1%
*Please note the current rates shown above apply to net dividends. The rates shown in our examples
below are slightly different, as the dividends are grossed up in the tax computations to include the
notional tax credit.
Impact of the Changes
The changes should benefit most investors who receive a small amount of dividend income, as this will be
covered by the £5,000 allowance. However it appears that the changes will increase the amount of Income Tax
paid by shareholders of owner managed companies that currently receive a small amount of salary and large
dividend payments. The precise details regarding how the new rules will work in practice have not yet been
published, so it is not currently possible to say for certain what your post 6 April 2016 tax position will be.
However, we have prepared the following examples of the likely consequences based on how we expect the
rules will work and the further guidance issued on 17 August 2015:
Example 1
For a higher rate taxpayer receiving £7,000 of dividend income from their investment portfolio in the 2016/17 tax
year:
Dividend income received
Dividend tax credit
Dividend allowance
Taxable dividend income
Income Tax
Less: tax credit
Total Income Tax
Reduction in Income Tax
Old Rules
£7,000
£778
New Rules
£7,000
(£5,000)
£2,000
£7,778
32.5%
£2,528
(£778)
£1,750
32.5%
£650
£650
£1,100
ST ALBANS OFFICE: Faulkner House, Victoria Street, St Albans, Herts AL1 3SE
T: 01727 833222 F: 01727 864752 E: [email protected]neressex.com
LONDON OFFICE: Tavistock House South, Tavistock Square, London WC1H 9LG
T: 020 7388 2641 F: 020 7387 8969 E: [email protected]
www.rayneressex.com
Rayner Essex is a business name of Rayner Essex LLP
Example 2
For a small business owner expecting to receive a salary of £11,000 and dividends of £28,000 in the 2016/17 tax
year:
Old Rules
£28,000
£3,111
Dividend income received
Dividend tax credit
Dividend allowance
Taxable dividend income
Income Tax
Less: tax credit
Total Income Tax
New Rules
£28,000
(£5,000)
£23,000
£31,111
10%
£3,111
(£3,111)
£0
7.5%
£1,725
£1,725
Increase in Income Tax
£1,725
Example 3 – Updated Following Further Guidance Issued by HM Revenue and Customs
For a small business owner expecting to receive a salary of £11,000 and dividends of £80,000 in the 2016/17 tax
year:
Old Rules
£80,000
£8,889
Net dividend
Dividend tax credit
Dividend allowance
Taxable dividend income
Income tax
- First £32,000
- First £27,000
- Remaining £56,889
- Remaining £48,000
Less: tax credit
Total Income Tax
Increase in Income Tax
New Rules
£80,000
(£5,000)
£75,000
£88,889
10%
£3,200
32.5%
£18,489
(£8,889)
£12,800
7.5%
£2,025
32.5%
£15,600
£17,625
£4,825
Salary or Dividends
Please note that under the new rules generally it still appears to be more tax efficient to extract money from your
company by way of dividends rather than salary, assuming the new rules work as expected. However your usual
Rayner Essex contact will be happy to discuss your profit extraction strategy with you once the final rules have
been published to determine if any adjustments would be beneficial.
We expect final legislation and guidance to be published in the Autumn at the time of the Autumn statement
which will be towards the end of the year.
Disclaimer: Please note that this document is not intended to give specific technical advice and should
not be construed as doing so. It is designed to alert clients to some of the issues and not intended to
give exhaustive coverage of the topic. Professional advice should always be sought before action is
either taken or refrained from as a result of information contained herein.
20 August 2015
ST ALBANS OFFICE: Faulkner House, Victoria Street, St Albans, Herts AL1 3SE
T: 01727 833222 F: 01727 864752 E: [email protected]
LONDON OFFICE: Tavistock House South, Tavistock Square, London WC1H 9LG
T: 020 7388 2641 F: 020 7387 8969 E: [email protected]
www.rayneressex.com
Rayner Essex is a business name of Rayner Essex LLP
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