Currently all UK dividends are paid with a notional 10% tax credit. In effect, basic rate taxpayers do not incur any additional on dividends received and higher rate tax payers incur an additional tax liability at the effective rate of 25% (and top-rate taxpayers incur a liability at the effective rate of 30.56%.
Taxation on dividends
From 6th April 2016, this tax credit is to be scrapped so in future all dividend income will be treated as gross income. In addition, it has been announced that the rates of tax applied to dividends are to be 7.5% for basic rate tax payers, 32.5% for higher rate and 38.1% for top rate tax payers. The first £5,000 of dividends received will be free of tax.
These changes will have an effect on those tax payers who receive significant dividends from companies, especially owner managed companies where it has become common practice to distribute the company’s funds by way of dividend rather than salary. It is therefore advisable to seek assistance in order to decide on future remuneration policies, due to these changes.
