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Dividend Allowance – The Government’s attempt to match an incorporated business’s tax to that of a sole trader – See below for the facts and my view

Legislation included in Finance Bill 2016 implements the new 0% rate for dividend income as well as changing the rates of tax for dividend income. Once in play, the changes will apply from 6 April 2016. Broadly speaking, the new nil rate applies to the first £5,000 of a person's dividend income and is available annually. From 6 April 2016 UK residents pay tax on any dividends received over the £5,000 allowance at the following rates:

7.5% on dividend income within the basic rate band;

32.5% on dividend income within the higher rate band; and

38.1% on dividend income within the additional rate band.

Dividends received on shares held in an Individual Savings Account (ISA) continue to be tax free.

Individuals in receipt of dividend income who will fall into the self-assessment regime for the first time will need to notify HMRC accordingly and register by 5 October following the end of the tax year. Self-Assessment returns for the 2016-17 tax year need to be registered by 5 October 2017, the tax paid and return submitted by 31 January 2018. See HMRC link

In my view, the introduction of the new allowance is an attempt to match an incorporated business’s tax to that of a sole trader thus reducing the need to incorporate purely for taxation reasons. Those that do still wish to incorporate will have little advantage tax wise, however this is not the whole story. (See the advantage that remains in my paragraph below, headed ‘How trading as a sole trader stunts the growth of a small business:’. Those trading through a Limited company will make payments as dividends rather than as wages and now in the main will not lower their tax bill in comparison to that of a sole trader. This move will assist the Government with its plan to reduce the rate of corporation tax in the coming years and will not benefit those wishing to incorporate simply to reduce their tax bill – The reduction in corporation rates were announced in the 2016 Budget, the main rate of corporation tax is expected to be reduced from its current rate of 20% to 17% by 2020.

The overall policy objective is that only those with significant dividend income or those who are able to pay themselves dividends in place of wages will pay more tax. It is estimated that around one million individuals will pay less tax on their dividend income due to the new dividend allowance.

The dividend allowance will apply to dividends received from UK resident and non-UK resident companies. Dividend income that is within the dividend allowance (and savings income within the new savings allowance) will still count towards an individual's basic or higher rate limits - and may therefore affect the level of savings allowance that they are entitled to, and the rate of tax that is due on any dividend income in excess of this allowance.

In calculating into which tax band any dividend income over the £5,000 allowance falls, savings and dividend income are treated as the highest part of an individual's income. Where an individual has both savings and dividend income, the dividend income is treated as the top slice. 

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Added By: Sue Taylor on 21st Sep 2016 - 11:41
Last Updated: 21st Sep 2016 - 11:53

Number of Views: 1093
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