In Focus: Tax Year End  

Change to dividend taxation: past, present and future

  • To learn how the latest changes to dividend taxation affect advice
  • To understand how dividend taxation changed over time
  • To learn how to mitigate the impact of higher dividend tax liabilities for clients
CPD
Approx.30min
Change to dividend taxation: past, present and future

New changes to dividend taxation are due to come into effect from April 6 2022, including a higher rate of taxation and a higher dividend trust rate.

In light of this it is good to take stock of the changes to the way dividends have been taxed in recent times and the impact this has had on clients with dividend income.

Where we started

Prior to the Finance Act of 2016, dividend payments were made to the client with a 10 per cent tax credit to cover the basic rate of tax.

If the client was a higher rate taxpayer further tax was due and would need to be paid by the client and declared on their self-assessment tax return, remembering that dividend income is calculated after non-savings and savings income when looking at someone’s overall income tax liability.

The way the effective rate of tax for dividends was worked out was multiplying the dividend amount received by 10/9 to arrive at the gross taxable figure. The effective tax rate (ie the tax rate less the 10 per cent credit) was 0 per cent for basic rate, 25 per cent for higher rate and 30.56 per cent for additional rate taxpayers. This was a better position for the latter as prior to April 2013, dividends were taxed at 36.11 per cent for additional rate taxpayers.

So what happened in 2016?

From April 6 2016 the way dividends were taxed changed. All UK dividends are now paid gross to the investor from this date and new rates of tax as well as a dividend allowance were introduced as detailed in the table below:

Tax free allowance

Basic rate 
taxpayer

Higher rate  taxpayerAdditional rate taxpayerDiscretionary trustees
£5,000 at 0%7.5%32.5%38.1%38.1%*

*No dividend allowance; and assuming the standard rate band has been exhausted.

The first £5,000 of dividend income was covered by a dividend allowance and there was no tax to pay.

Dividend income over this allowance was taxed at 7.5 per cent for a basic rate taxpayer, 32.5 per cent for a higher rate taxpayer and 38.1 per cent for an additional rate taxpayer.

For discretionary trustees however, they did not get a dividend allowance. Instead they had a standard rate band, meaning the first £1,000 of income was taxed at lower rates, 7.5 per cent for dividend income and 20 per cent for all other income.

However, we must remember that this standard rate band could be spilt depending on the number of settlements the settlor had set up, up to a maximum of five, so it could be as little as £200. Above that, discretionary trustees would be taxed at 38.1 per cent for dividend income and 45 per cent for all other income.

 

What this also meant for clients was, where they received dividends under £10,000, they could contact HM Revenue & Customs and inform them of this payment, they could then ask for their tax code to be changed and the tax taken from wages or pension income, or they could complete on a self-assessment if they were already submitting one.