Changes to the taxation of dividends

In the Chancellor’s Budget last July, the rules relating to taxing dividends were changed in a way which may help small investors but will have a significant impact on owners of private companies who are largely remunerated by taking dividends.

The first main change is that the level of tax on dividends has been increased by 7.5% across the board but at the same time the Government has abolished the “notional tax credit” on dividends so that the tax credit does not have to be added into your taxable income to work out whether you have to pay any additional tax. Also there is to be a £5,000 tax-free dividend allowance, so that the first £5,000 of dividends should be tax-free, therefore helping the small investor.

The Revenue has issued some examples as to how the rules will work in practice and these are available at www.gov.uk/government/publications/dividend-allowance-factsheet

While this change, which is intended to be effective from April 2016, will be helpful to individuals who do not have more than £5,000 of dividends each year, it is likely to create an additional tax burden for those who are remunerated from their businesses through the payment of dividends. It will also have a particularly harsh effect on discretionary trusts (otherwise known as flexible trusts or relevant property trusts) since, although it seems that the first £1,000 of dividends will only be taxed at 7.5%, the £5,000 dividend allowance is only available to individuals and therefore dividends over £1,000 received by discretionary trusts will be taxed at 38.1%. The same issues do not apply to life interest trusts. Since, as the beneficiary under those trusts has the right to the income, the same rules should apply to that beneficiary as will apply to individuals.

If you are involved with a trust and need advice on the effect of these changes or re-structuring the trust in the light of them, please contact Adam Bruce on (01267) 237441.

Please note that the information above may change prior to the new rules coming into effect.