The next step

To the HMRC notice of dividend tax

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On the savings allowance

[Further Information]

Our dividend checklist and document pack

[Document]

Pay extra dividends now?

Dividend tax

The 2015 Summer Budget included the shock announcement that, from 6 April 2016, the tax rate on dividends will increase by 7.5%. It wasn’t all bad news though. The tax credit (equal to 1/9th of a dividend) which increases the taxable amount will be abolished. Also the first £5,000 of dividends you receive will be tax free. This means investors who receive modest dividend income will be better off. The government’s real targets for the higher tax are owners of small to medium-sized businesses who take a large part of their income as dividends.

How will the new tax work?

The Summer Budget announcement seemed simple enough, but when experts looked closer at the £5,000 dividend allowance it wasn’t clear how it would apply to higher rate taxpayers. In fact, the position was so unclear that HMRC issued a notice explaining how it expects it to work (see The next step ). Despite this questions remain, especially over how the dividend allowance will interact with the new savings allowance which also comes into effect in April 2016 (see The next step ). However, more guidance is on the way.

Autumn Statement

If the government follows its usual timetable we can expect more information about the new dividend tax rate and allowance in the Autumn Statement, which is scheduled for 25 November 2015. The Finance Bill 2016 , which will contain the detailed rules, will be published soon after. At that point it will be possible to pin down exactly how the new dividend tax rate will apply.

Tax planning

It seems sensible for director shareholders to pay themselves extra dividends before the higher tax rate comes into effect in April 2016. However, the Chancellor could try to block this tax dodge by announcing anti-forestalling measures to take effect on the day of the Autumn Statement. We think it’s unlikely, but it can’t be ruled out.

Tip. If you’re considering paying extra dividends before 6 April 2016 to avoid paying the higher tax rate, why not pay them before the Autumn Statement to rule out the chance of getting caught by anti-forestalling rules.

Get your timing right

If you pay extra dividends to beat the Autumn Statement or 6 April 2016, timing is important. Company law determines the date dividends are treated as paid, which is also the date of payment for tax purposes. There are different rules for interim and final dividends.

Avoiding a possible trap. It’s seems likely that HMRC will look closely at the tax returns of director shareholders who receive unusually large dividends in 2015/16. It will want to check that the dividends were actually paid in accordance with company law when the director shareholder said they were. Our dividend checklist and documents pack will help you comply with the rules and provide documentary evidence should HMRC decide to investigate (see The next step ).

For a link to the HMRC notice on dividend tax, more information about the savings allowance and our dividend checklist and documents pack, visit http://tipsandadvice-tax.co.uk/download (TX 16.02.06).