The dividend tax reform: How the new rates affect you

10Welcome to another Premier Tax Solutions post about updates from the UK Summer Budget 2015. As promised, this post is about one of the biggest shock announcements – the dividend tax reform, and how it affects you.

How dividends were taxed

Previously, a limited company would declare a dividend, which was the ‘net’ dividend amount. A ‘notional tax credit’ would then be calculated and added on, resulting in the ‘gross’ dividend, which was the amount on which an individual was taxed. However, the individual would only ever receive the ‘net’ figure.

Below are the old dividend tax rates:

  • 10% within the basic rate tax band;
  • 32.5% within the higher rate tax band; and
  • 37.5% within the additional rate tax band.

The ‘notional tax credit’ was then deducted as tax that was deemed to have been paid, even though no one actually paid it anywhere.

If you were a basic rate taxpayer, you would effectively receive dividends tax-free, because what you received was the ‘net’ dividend. The ‘notional tax credit’ was calculated as 10% of the ‘gross’ dividend, and as an individual you were taxed at 10% on the gross amount, bringing you right back where you started!

But what if you’re NOT a basic rate taxpayer?

Here’s where it gets more complicated: if the tax rate for the higher rate band was 32.5% and the ‘notional tax credit’ was 10% of the ‘gross’ dividend, then you would be taxed at 25% on the ‘net’ dividend. Confused?

New rules on dividend tax

In the UK Summer Budget 2015, the Chancellor announced a reform to simplify the rules on dividend tax. There is now no longer any ‘notional tax credit’, which also puts an end to ‘net’ and ‘gross’ dividends. Instead, there will be just one amount, which is declared by the limited company, and the individual receiving it will be taxed on that amount at the following new rates:

  • 0% on the first £5,000 of dividend income;
  • 7.5% on the amount of dividend falling within the basic rate tax band;
  • 32.5% on the amount of dividend falling within the higher rate tax band; and
  • 38.1% on the amount of dividend falling within the additional rate tax band.

So are you better or worse off? Or do you require further explanation? If you are a company director or are in receipt of dividend income, and would like someone to explain what all this means for you personally, give the friendly tax experts at Premier Tax Solutions a call on 01782 479 699. We’re always happy to help!

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