HMRC published a policy paper entitled “Dividend Allowance factsheet” 17 August 2015. It can be downloaded at https://www.gov.uk/government/publications/dividend-allowance-factsheet
The introduction on the GOV.uk website is a bit lightweight:
“From April 2016 a new tax-free Dividend Allowance will replace the Dividend Tax Credit. Headline rates of dividend tax are also changing.
The Dividend Allowance means that you won’t have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have.
The allowance is available to anyone who has dividend income.”
However, the factsheet does confirm a couple of useful issues:
1. The Dividend Allowance will not reduce your total income for tax purposes, and
2. Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.
So even though the first £5,000 of dividend income is not taxable, the income still forms part of your taxable income and affects the rate at which you pay the new dividend tax (7.5%, 32.5% or 38.1%), should it be payable.
The professional press is alive with the consequences of this new tax. Deep thought is being given to the factors that will now decide the optimum salary v dividend split for smaller company owners. The issues that need to be considered are now multitude:
• The level of the basic personal tax allowance
• The rates and banding for income tax purposes
• The rates and banding for National Insurance purposes
• Does a company qualify for the Employment Allowance – one person companies will be disqualified from April 2016 – other companies will be able to utilise the increased £3,000 allowance from this date.
• The amount, if any, of dividend tax payable.
• The impact on Corporation Tax – increased salaries mean lower CT bills.
Creating a spreadsheet to handle the calculations will be a formidable task. No doubt someone, somewhere, is hard at it?