Dividend Allowance reduction to have wide impact
12th March 2018
The tax rules surrounding dividends have changed drastically in recent years. The tax- free Dividend Allowance has dropped from £5,000 to £2,000 per annum from April 2018.
This change could have a significant impact on many, whether you own shares in your own company, you hold shares as investments, or even if you run your own self-employed business.
The dividend rules
April 2016 saw the introduction of new tax rules regarding dividends, including:
- Individuals being entitled to a tax-free dividend allowance, and
- Dividend income in excess of this allowance being taxed at 7.5%, 32.5%, or 38.1% depending upon an individual’s level of income.
This was a change from the previous rules where no further tax was due on dividends paid to individuals whose total income was below the higher rate tax threshold.
Businesses paying their owners in dividends were most affected
One of the biggest impacts for owner-managed companies is where owners have taken dividends each year to top their income. The most tax-savvy company owners took dividends to top up their income to the higher rate tax threshold without paying further tax. From April 2016 they changed their behavior to accommodate the £5,000 tax-free dividend allowance and new tax on dividends.
With the reduction of the dividend allowance to £2,000 from April 2018 these owners will need to revisit their dividend strategy and consider their options.
What about sole traders and partnerships?
Another group that need to be aware of the changes to the dividend rules are the self-employed, (sole traders or partners in a business). Why, you may ask, given they won’t be receiving dividends?
The simple answer is that, for self-employed businesses, especially growing ones, there comes a point where it is more tax-efficient to operate the business through a limited company instead. There can be a number of other reasons for operating through a limited company should profits suffice which the self-employed need to consider.
The ways dividend are taxed will have an impact on when this decision is made, or the potential tax savings to be enjoyed.
Certain types of savings are affected too
Shares in exempt savings such as ISA’s or pensions are not affected by the recent changes or the planned reduction in dividend allowance.
Share investments could be affected however. Depending upon your circumstances it may be worth considering options such as re-organising your investments or considering more capital growth investments rather than income generating funds.
If you are not currently completing a self-assessment tax return
If your dividend income is above the new threshold of £2000 then, from April, tax will be due.
You will need to notify HMRC and may need to complete and submit a self-assessment tax return. This could catch out many individuals who have not previously needed to complete a tax return.
Take advantage of a FREE Dividend Impact Review
Grant-Jones Accountancy Ltd are launching a Dividend Impact Review service today. We will be able to identify whether the changes will impact you whatever your circumstances, quantify the potential impact, and what action can be taken.
The service is normally worth £675 + VAT but we are offering it free to the first 40 customers.
If you are interested in finding out how the changes impact on you and what action to take please contact us now on 01276 682588 or Email firstname.lastname@example.org and book your Dividend Impact Review.
Grant-Jones Accountancy Ltd