Springfords LLP News

To receive our quarterly e-newsletter filled with the kind of news you can use, register here.

Changes to Dividend Tax

27 October 2015

The recent Budget, on 8 July 2015, announced changes to the taxation of dividends which will apply from 6 April 2016. 

The New Rules

The tax legislation has not yet been published but it has been announced that the deemed 10% tax credit currently attributed to dividends will disappear. 

The new rates of tax which will apply to dividends are as follows:


Current effective rate of dividend tax


New rate of dividend tax (from 6 April onwards) 


Basic rate taxpayer



Higher rate taxpayer



Additional rate taxpayer




A new dividend allowance will apply for the first £5,000 of dividends received by each individual.  This isn’t an exemption but instead effectively taxes the first £5,000 of dividends at 0% whilst still using up your basic/higher rate bands.

The new rules don’t affect your tax free personal allowance, which can still be used to reduce your level of taxable income.

What Does This Mean?

The tax changes are projected to generate additional tax receipts for HMRC of just under £6.8 billion over the next 5 years.

Shareholders of owner managed businesses (who typically extract the majority of profits by way of dividends) and other individuals who receive a large proportion of their taxable income as dividends are likely to face significantly higher tax bills in future years. 

For example, a higher rate taxpayer receiving dividend income of £50,000 would suffer a tax charge of £12,500 under the old rules but this will increase by £2,125 to £14,625 under the new rules.

There will however be some ‘winners’ under the new rules.  For example, a higher rate taxpayer receiving a dividend of £10,000, would suffer a tax charge of £2,500 under the old rules but this will reduce by £875 to just £1,625 under the new rules.

What Should I Do?

Generally, basic, higher and additional rate taxpayers will pay more tax if their annual dividend income exceeds £5,000, £21,667 and £25,250 respectively.  If you generally receive dividends in excess of this, you may therefore wish to speak to your tax adviser about any tax planning opportunities available to you.

For instance, you may wish to consider:

  • Paying dividends prior to 6 April 2016 to bank the existing lower tax rates (note that dividends need not always be paid in cash and can instead, provided appropriate paperwork and accounting entries are made, be dealt with by adjustment to directors’ loan accounts for future draw down when cashflow permits). We do not anticipate any specific anti-avoidance provisions that would prevent this but, as mentioned above, the legislation is still being drafted (the legislation is expected to be issued in December 2015).
  • Gifting shares to spouses and other family members to use each of their £5,000 dividend allowances and lower dividend tax rates (the tax implications of the gift itself would also need to be carefully considered).
  • Extracting funds by way of a loan from your company (and accepting the benefit-in-kind and close company loan to participator charges that this can entail).

When paying dividends, other issues always need to be considered.  For example:

  • Dividends can only legally be declared if the company has sufficient distributable reserves (after taking account of any accounting adjustment that may be needed under the new FRS102 accounting standard).
  • You will need to consider the impact on any bank covenants or lending criteria if the company has (or wants) loan finance 
  • If the increased dividend income causes your income to exceed £50,000 this could cause a clawback of child benefit under the High Income Child Benefit rules
  • If the increased dividend income takes your income above £100,000 you could lose entitlement to personal allowances, which could reduce the tax saved from advancing the dividends

The age old question of “should I take dividends or bonuses?” should also be reviewed.

The simple answer is that dividends will still remain the more tax efficient option for most people.  However, the differential tax cost between the 2 options will reduce once the new dividend rates apply. 

Extracting profits from companies by way of employer pension contributions, interest and rental payments will also become more attractive once the new dividend rates apply.

Self-employed individuals and partnerships should also take advice if planning to incorporate into a company, as this may no longer be the best option, depending on your individual circumstances. 

For further information about any of the above, speak to your normal Springfords tax adviser or contact

Contact Us
  terms & privacy
Part of Baldwins