Dividend taxation rules set to change this week

New legislation for the tax treatment of dividends is set to commence this week. From Wednesday 6th April the first £5,000 of dividend income earned by shareholders each year will be tax-free.

Last summer, Chancellor, George Osborne announced the plans in his 2015 Summer Budget, with the current Dividend Tax Credit system replaced by the new Dividend Allowance.

The new allowance will help address the incentive for some people to set up a company and make payments as dividends rather than wages, simply to minimise their tax bill.

If successful, the new allowance will help towards the government’s plan of reducing the rate of corporation tax to 18 per cent by 2020.

UK residents will pay tax on any dividends received over the new £5,000 allowance at the following rates:

• 7.5% on dividend income within the basic rate band

• 32.5% on dividend income within the higher rate band

• 38.1% on dividend income within the additional rate band

Dividends received on shares held in an Individual Savings Account (ISA) will remain tax-free.

Martin McTague, policy chairman, The Federation of Small Businesses (FSB), said: “While we understand the rationale for addressing the long recognised imbalance in the tax system due to the tax treatment of dividends, it comes at a challenging time for our members.

“They are already dealing with the National Living Wage, auto-enrolment of pensions and the possible mandation of quarterly tax returns.

“The current tax system for small businesses remains overly complex, bureaucratic and hard for businesses to navigate. Many feel either forced to pay for expensive tax advice or run the risk of failing to comply.”

According to the Government, only those with significant dividend income, or those who are able to pay themselves dividends in place of wages, will pay more tax.

Around one million individuals will pay less tax on their dividend income due to the new Dividend Allowance.

Date published 4 Apr 2016 | Last updated 4 Apr 2016