Changes to dividends payments


New tax rules affecting dividend income payments come in from April 2016 and could mean small business owners needing to review their personal remuneration strategies.


Choose a chapter

 

 What is changing?

The previous Dividend Tax Credit is disappearing and being replaced with a new tax-free Dividend Allowance of £5,000 for all taxpayers.

Back to top

 Why the system is changing

The move is part of an attempt to simplify the tax system in advance of digitisation. According to the Treasury, it will also "start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities."1

Under the new system, no one will pay tax on the first £5,000 of dividend income. But thereafter, the tax rates will vary depending on what non-dividend income the individual receives.

Back to top

 How the new system works

Basic rate taxpayers will pay 7.5% on dividend incomes; higher rate taxpayers will see an increase from 25% to 32.5%, while those worst affected will be top-rate taxpayers who will now pay 38.1%.

Dividend tax rates by band  

Tax yearBasic (20%)Higher (40%)Additional (45%)
2015-16*025%30.6%
2016-17+7.5%32.5%38.1%

* Effective tax rates for 2015-16 have tax credit applied
+ Introduction of £5,000 tax-free dividend allowance. Source HMRC  

Any income included within the Dividend Allowance will also be counted towards your total income for tax purposes. Dividends received through shares in an ISA or a pension will remain tax-free and won’t count towards the Dividend Allowance.

Back to top

 The impact of the change

Changes to dividend taxation rates are estimated to cost entrepreneurs and small business owners £6.8bn in tax during the next five years.2

For family businesses the effects could be multiplied, if more than one family member is taking a dividend income. However, changes on the tax horizon in 2017 will soften the impact, with Corporation Tax due to drop from 20% to 19%.

For those entrepreneurs considering a sale, the growing disparity between tax on dividends and the tax due on the profits from a company sale (entrepreneurs relief is only 10% on lifetime capital gains up to £10m) may be seen as a tempting reason to sell.

If you think you will be affected by the change in dividend payments tax, speak to your accountant or tax adviser.

Back to top

 Example of how the change impacts on a business

(Source HMRC)3

If you have a non-dividend income of £18,000 and receive dividends of £22,000 outside of an ISA.

Of the £18,000 non-dividend income:

£11,500 is covered by the Personal Allowance.

The remaining £6,500 is taxed at Basic Rate.

 

Of the £22,000 Dividend Income:

The Dividend Allowance covers the first £5,000.

The remaining £17,000 of dividends to be taxed at the Basic Rate (7.5%).

Back to top

 

Useful link

HMRC Dividend Allowance Factsheet

 

1Budget Red Book at 1.189.

2Telegraph 8 July 2015

3HMRC Example


While all reasonable care has been taken to ensure that the information in this guide is correct, no liability is accepted by Lloyds Bank for any loss or damage caused to any person relying on any statement or omission in this business guide. This guide is provided for information only and should not be relied on as offering advice for any set of circumstances and specific advice should always be sought in each instance. When using these services your agreement will be with the relevant third party and their terms and conditions will apply.

Lloyds Bank shall not be responsible or liable to you for any failure by the third party to provide these services in relation to use by the third party of any confidential information supplied to them by you. Please note that any data sent via e-mail is not secure and could be read by others. Please be aware that there are certain circumstances where we are unable to accept e-mail instructions - for further information, please contact your relationship manager or business management team.

Calls may be monitored or recorded in case we need to check we have carried out your instructions correctly and to help improve our quality of service.

Lloyds Bank plc Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Telephone: 0207 626 1500.

Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under Registration Number 119278.

We subscribe to The Lending Code; copies of the Code can be obtained from www.lendingstandardsboard.org.uk

Eligible deposits with us are protected by the Financial Services Compensation Scheme (FSCS). We are covered by the Financial Ombudsman Service (FOS). Please note that due to FSCS and FOS eligibility criteria not all Business customers will be covered.