10 Top Tips about the new Dividend Tax

10 Tips to help you while tackling the new dividend tax

With the introduction of the new dividend tax, there is a lot of apprehension among people. In the previous system, basic-rate taxpayers were exempted from paying any tax on the dividends but higher-rate taxpayers were charged a tax at a rate of 25 per cent and additional-rate tax payers pay 30.56 per cent. Since dividends come from the profit of a limited company which has already been charged the corporation tax, this seemed reasonable. But the new policy changes the tax rates and comes to effect from April 6, 2016. We offer you some tips on how to minimize your dividend tax.

1. Be aware of the changes

According to the new dividend tax, all those who receive an income more than £5,000 from dividends will need to pay an increased amount of dividend tax. Only the first £5,000 obtained from dividends in a year will continue to be free from this.  Basic taxpayers need to pay 7.5 per cent tax, higher-rate taxpayers will have to pay 32.5 per cent tax and the additional-rate taxpayers face an increased tax rate of 38.1 per cent.

But this is not bad news for everyone. Even though basic-rate tax payers will begin to be charged for their dividend income above £5,000, for some higher-rate tax payers this is a welcoming move. Thanks to the £5,000 allowance, higher-rate taxpayers who receive dividend income less than £5,000 a year will no longer need to pay tax on dividends unlike the previous scenario where they were charged 25 per cent irrespective of the dividend income earned.

2. Use the £5,000 allowance

The first £5,000 income earned from dividends is free from dividend tax whether you are a basic-rate taxpayer, high-rate or additional-rate taxpayer. Make sure you use it.

3. Know about your personal allowance

Personal Allowance is the amount which one can earn without the need to pay any tax on.  This amount has been increased to £11,000 in 2016 and will see an additional rise to £11,500 in April 2017 from the present amount of £10,600.

Even though the new regime has brought new tax rates for all tiers of taxpayers, dividend income is still qualifies for the personal allowance. So in 2016 if you earn £16,000 as dividend income you are exempted from paying the dividend tax. This is because the personal allowance takes care of £11,000 and the rest £5,000 is cleared because of the allowance in dividend tax.

4. Tips for couples

Couples must utilize the basic tax rate bands and personal allowances properly so as to ensure that the taxable dividend payments are done in the name of the spouse who pays the lowest tax rates. To make complete use of personal allowances, couples can consider sharing their taxable portfolios between them.

5. Choose ISAs

You can shelter your taxable investments through an ISA. Dividends within ISAs are free of tax. This year the allowance for investing in ISAs £15,240 and hence make the most of it. Married couples can use the allowance of both the partners.

6. Use Offshore bonds

Offshore bonds are a form of specialized investment which let investors to defer tax and also allow a 5% withdrawal without tax. These can be useful for higher-rate taxpayers.

7. Make use of VCTs

You can make use of Venture Capital Trusts (VCTs) which produce dividends free of tax. But these investment schemes can be of higher risk.

8. Diversify your portfolio

Make your portfolio diverse so that it includes investments which offer dividend incomes at different levels. Then you can shelter the shares which give higher income in an ISA so that the dividend income tax allowance is increased.

9. Utilize SIPPs

SIPPs (Self invested personal pensions) are well known as the efficient investment scheme for saving for your life after retirement. They offer tax-free dividends.

10. Try to decrease other income

With the introduction of the new dividend tax regime, dividend tax and income tax have become closely linked. So by decreasing the other taxable income you can reduce the dividend tax to be paid.  You can reduce the taxable income for a year through different methods like spreading the investment portfolio in such a way that certain assets are transferred to a spouse who earns the lower amount in comparison.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.