Dividend tax increase may impact you sooner than you think

Dividend tax is all set to increase on 6 April 2016. But it could impact some people sooner with rumours that the 25 November Autumn Statement may include HMRC anti-avoidance measures. Should you be worried about this? Read on to find out.

What’s happening to the dividend tax rate?

This year’s Summer Budget gave us the news that the dividend tax rate will increase by a whopping 7.5% on 6 April 2016. However, the positive side to that is that there’s a new £5,000 tax-free dividend allowance along with the abolishment of the dividend tax credit.

What this means for taxpayers

The good news is that investors with small investments will be better off. The bad news is that small and medium business owners – who perhaps use dividends as a way of maximising their earnings – appear to be the target for this reform, and will be hit firmly in the pocket.

How the new dividend tax rules will work

You’ll pay tax on dividends over £5,000 at the following rates:

Basic rate dividend income = 7.5%
Higher rate dividend income = 32.5%
Additional rate dividend income = 38.1%

HMRC has issued guidance explaining how the dividend tax rate will be applied, along with examples of how it will work in different situations.

The information released by HMRC has so far been reasonably straightforward, but there are still a few grey areas about how the dividend allowance will work in practice alongside other allowances such as the new savings allowance also announced for April 2016.

When will we know more about dividend tax rules?

The government’s Autumn Statement is on 25 November 2015, so there should be more information about the dividend tax rate and allowance then, along with the new savings allowance in that. The Finance Bill 2016 will be issued shortly after the Autumn Statement and should contain the detailed rules about how the new rates and allowances will be applied.

Paying yourself extra dividends now

Paying extra dividends ahead of the introduction of the new rates on 6 April 2016 could be a sensible option, and certainly one worth considering. However, the Chancellor may attempt to counteract this by announcing anti-forestalling measures as part of the Autumn Statement. These measures aim to limit the opportunity for tax avoidance, but a possible workaround is to pay any extra dividends before the Autumn Statement on 25 November 2015.

Tread carefully

Another area of caution is that HMRC is likely to be keeping an eye out for the 2015/16 tax returns of director shareholders whose dividends payments are unusually high. Therefore, it’s important that your timing is right and done in accordance with company law, as HMRC is likely to check that dividends were paid on the date that the shareholder said they were. And don’t forget the different rules that apply to interim and final dividend payments.

Next steps

There’s a lot to consider, but not a lot of time to take action before the Autumn Statement. So, whether you decide to make extra dividend payments by 25 November this year or 6 April next year, it’s important to have a plan of when it’s appropriate to do so to avoid getting into hot water with HMRC. Unsure? Seek advice from your accountant.

To find out how KPP can help you plan your dividend strategy or to discuss our other services contact Stephen Usher on 0141 345 2355 or email stephen.usher@keypp.co.uk

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