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Nasty shock on the cards

Shareholders who receive significant income from their investment dividends could be in for a nasty shock when new rules come into effect next year, warns Dyke Yaxley's Senior Tax Planner, Tony Elliott.

Chancellor George Osborne is replacing the existing tax credits system on dividend income with a £5,000 tax-free allowance in April.

And Tony said those with ‘significant’ amounts of money invested in shares could see their tax bills rise.

His comments come after HM Revenue & Customs issued a factsheet to clarify the way the new system will operate.

“It shows that the new system might not turn out to be quite as generous to some medium to large-scale shareholders as was initially thought. In general, those people who receive relatively modest levels of income from shares will either benefit, or see no change at all.

“But people with significant dividend income – particularly if they are basic rate taxpayers near the top end of the scale – could be in for a nasty shock when they calculate what it is going to do to their tax bill. Some people will find themselve paying tax on dividends for the first time."

Tony said: “The new rules, which were announced at the last Budget, certainly simplify the dividend tax system, and make it easier for small-scale shareholders to keep their dividends out of the tax bracket.

“But with just over six months until the new regulations come into effect, it is worth taking a look at what the implications might be on the money you receive from your share investments." Tony added "The new dividend tax regime will be particularly hard on small and medium-sized business owners who have traditionally received a mix of salary and dividend as part of their remuneration."

Currently, people receiving dividends benefit from 10% tax credit.  Given the tax on dividends for basic rate taxpayers is 10%, it means basic rate taxpayers effectively receive their dividends tax-free.

Under the new system, everyone who receives dividend income will not pay tax on the first £5,000.  But basic rate taxpayers will pay 7.5% on any additional dividend income, while higher rate taxpayers will pay 32.5% and the highest earners will pay 38.1%.

The rules will be introduced in April 2016, along with the new personal allowance of £11,000 and £32,000 higher rate tax band.

Tony Elliott, Senior Tax Planner