There has been much commentary in the last week or so concerning the reduction in the Dividend Allowance. This follows the Chancellor’s surprise announcement in the Spring Budget that this would be reduced to £2,000 from April 2018. It would seem an appropriate time to remind individuals that significant changes took place to the taxation of dividends at the start of this current tax year when the £5,000 Dividend Allowance commenced. Not only was the Dividend Allowance introduced but also the tax credit previously attached to dividends was abolished. This means that basic rate tax payers will now be taxed on dividends exceeding this amount at 7.5%, higher rate payers at 32.5% and additional rate tax payers at 38.1%.
The Chancellor, when announcing the Dividend Allowance of £5,000 in his Summer Budget in 2015, said, “This will ensure that ordinary investors with smaller portfolios and modest dividend income will see no change in their tax liability,” and, “that the changes will reduce the incentive to remunerate through dividends rather than through wages.” It is possible that many individuals will not be affected, after all, £5,000 is quite a significant amount. However, for those who have dividend income that exceeds this, but have historically not needed to pay additional income tax or report the income to HMRC as they are basic rate tax payers, 2016/17 will be the first tax year where income tax may be payable. Depending on the amount of dividend income, reporting the income may be done by contacting HMRC if it is below £10,000 and updating your personal PAYE code so that the tax due on the dividends is collected by adjusting the income tax deducted from salary or private pensions. If, however, your dividend income is over £10,000, you will be required to register for self assessment before 5 October 2017 and complete and file a tax return by 31 January 2018.
It is not possible in the final few days of the 2016/17 tax year to minimise the impact of the £5,000 Dividend Allowance but there may be steps that can be taken to reduce the tax impact in 2017/18.
The reduction of the Dividend Allowance to £2,000 in 2018/19 will inevitably affect more individuals – those who have chosen to save by investing in stocks and shares may find that a relatively modest portfolio generates this level of income. The good news is that there is still time to plan for your income from securities.
If you are uncertain whether you will be affected by these changes please contact the team at firstname.lastname@example.org or call 01603 723666 and we will be happy to help.