Rules outlined in the Finance Bill 2016 will see to it that the 10 per cent tax credit on dividend income is abolished from 6th April 2016, and a £5,000 dividend tax allowance will replace it.
The Tax Faculty at the Institute of Chartered Accountants in England and Wales (ICAEW) has recently been communicating with the Treasury in order to create guidance on how the new allowance will operate, which is expected to be published on the GOV.UK website this week.
A draft of the soon-to-be-released Treasury guidance was shared with ICAEW representatives, to help provide an overview on how the new allowance will fit within the structure of existing personal allowances and tax rates.
Their observations state that the £5,000 dividend tax allowance is essentially a zero-rate of income tax which is only applied to dividend income, and it affects all taxpayers regardless of their marginal tax rate.
Under current rules, dividends are taxed as the highest share of income, in line with a taxpayer’s highest marginal tax rate.
While the first £5,000 of dividend income will be taxed at the zero rate, from 6th April 2016, any dividend income exceeding £5,000 will be taxed as follows: 7.5 per cent within the basic rate band, 32.5 per cent within the higher rate band, and 38.1 per cent in the additional rate band.
The change is likely to have a big impact on small company owner/managers that have historically paid themselves a low salary along with a more substantial amount from dividends.