>

Please feel free to get in touch

Technical View

Technical View


Welcome to this month’s Technical View. In the two previous issues of Technical View, we focused on the pension changes and the new residence nil rate band which were announced in the Treasury’s Summer Budget on 8 July. In this month’s Technical View, we take a closer look at another announcement from July relating to the changes to dividend taxation from tax year 2016/17.
 
Currently for non, starting and basic rate tax payers who receive dividend income, the income tax is deemed to be paid when these dividends are paid out or accumulated, they come with a notional tax credit of 10%.
 
For higher rate tax payers an additional 22.5% (32.5% total with the 10% tax credit) needs to be paid on dividends distributed or accumulated, for additional rate taxpayers it is an additional 27.5% (37.5% total) and for discretionary trusts, the trustees will also have to pay an additional 27.5% after the first £1,000 of income. It should be noted here that the first £1,000 (the standard rate band for discretionary trusts) could be split depending upon on the number of discretionary trusts established by the settlor and this £1,000 is to cover all income, not just dividends. The minimum each trust will have as a standard rate band is £200.
 
From April 2016, the 10% notional dividend tax credit is to be abolished and replaced with a new system of taxation.
 
The first £5,000 of income derived from dividends will be taxed at 0%, giving all individuals a new ‘dividend allowance’. For basic rate taxpayers, income above the £5,000 allowance will be taxed at 7.5%, 32.5% for higher rate tax payers and 38.1% for additional rate taxpayers. We are still waiting for further information regarding trustees of discretionary trusts. It is believed that the £5,000 allowance will be for individuals only, not trustees and that these trusts will be subject to the top rate of tax at 38.1% on dividend income in excess of the standard rate band of £1,000.
 
How this should work in practice is demonstrated in the two examples below, which looks at a basic rate tax payer and a higher rate taxpayer:

Example 1 – Basic rate tax payer

 
Mr Smith, a director and owner of a haulage company has earned income of £10,000 and £33,000 of dividends. From April 2016, his income will be taxed as follows:
 
Total Taxable Income                                                                                     £43,000
Minus personal allowance (£11,000 tax year 2016/17)                           £32,000*
*the personal allowance is applied to Mr Smith’s salary income first. All of his salary is within the personal allowance, with £1,000 of personal allowance left to set against his dividend income
 
Dividend allowance (£5,000)                                                                           £27,000
 
The threshold for higher rate tax to apply for 2016/17 is £32,000. Though the £5,000 dividend allowance means the client is not taxed, it is still part of the basic rate band. As all of his income is below this threshold, the remaining £27,000 of dividend income will be taxed at 7.5%, which means that the client will pay tax of £2,025, compared to £0 for tax year 2015/16 where the notional tax credit would have satisfied his liability.

Example 2 – Higher rate tax payer

 
Mrs Shaw has earned income of £42,000, and dividends from a share portfolio of £13,000. From April 2016 her income will be taxed as follows:
 
Total Taxable income                                                                                       £55,000
Minus personal allowance of £11,000                                                          £44,000*
*the personal allowance is applied to earned income first leaving £31,000 of earned income, which falls into the basic rate tax band (£32,000 for tax year 2016/17).
 
Dividend allowance of £5,000 (£1,000 of this is falls in to the basic rate band and £4,000 of the tax free allowance is used for the dividends that fall into the higher rate tax band).
 
The remaining dividends of £8,000 fall into the higher rate tax band and are taxed at 32.5% meaning she will have to pay £2,600 on this income.
 
If we compare this to her tax position in 2015/16 tax year, her dividends would be taxed as follows:
 
£1,000 would fall into the basic rate tax band and there is no further tax on this as it would be covered by the 10% notional tax credit. The remaining £12,000 dividend income would be subject to an additional 22.5% tax charge, meaning she would pay tax of £2,700, meaning she will pay less tax on her income from next tax year.
 
When changes to legislation are made, there will inevitably be some winners and some losers but it gives you as financial planners opportunities to speak to your clients and make changes to the client’s financial plan or notify them that they may need to consider restructuring their income. This is especially true of those clients who are currently receiving a small salary and receive their main income via dividends as they could be paying more tax come April 2016.
 
Hopefully this edition has provided some clarity on the potential changes to dividend taxation announced in the Summer Budget. If you have further queries on the content of this edition or other technical queries then please contact the Technical e-helpdesk at
 technical@sanlam.co.uk.

Date issued: 14.10.15

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at October 2015 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

Past performance is no guarantee to future performance. The value of investments can fall as well as rise so investors could get back less than they invest.

Sanlam & Sanlam Investments and Pensions are trading names of Sanlam Life & Pensions UK Limited (SLP (Reg.in England 980142)) and Sanlam Financial Services UK Limited (SFS (Reg. in England 2354894)). SLP is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. SFS is authorised and regulated by the Financial Conduct Authority. Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol BS1 2NH.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.