As covered in previous blogs on the C&B website, the unpopular new dividend tax was introduced on 6 April 2016, affecting dividend payments and income received during the 2016/2017 tax year.
Under the new dividend tax, the 10% tax credit has been abolished and, instead, the first £5,000 of dividends are tax free.
Once the £5,000 threshold is reached, dividends are now taxed at an additional 7.5% for all tax payers – eg:
7.5% for basic rate taxpayers
32.5% for higher rate taxpayers
38.1% for additional rate taxpayers.
This means that:
– A basic rate taxpayer with dividend income up to £5,000 is no worse off but any dividends received above this level will lead to a higher tax bill than in previous years.
– For higher rate and additional rate taxpayers, there is an initial tax benefit for dividends over £5,000 but as dividends increase there is a higher level of tax than under the previous rules.
– The tipping point for a higher rate taxpayer occurs when dividends received reach £21,666, for additional rate taxpayers, the amount at which the change will be felt is £25,400.
Also introduced on 6 April was a new Savings Allowance (SA), with savings income within the SA taxed at 0%.
The amount of SA depends on your marginal rate of tax; for example an individual taxed at the basic rate of tax has an SA of £1,000 whereas a higher rate taxpayer is entitled to an SA of £500.
Additional rate taxpayers receive no Savings Allowance.
Savings income includes:
– Interest on bank and building society accounts
– Interest on accounts with credit unions or National Savings and Investments
– Interest distributions from authorised unit trusts, open-ended investment companies (OEICs) and investment trusts
– Income from government or corporate bonds
– Most types of purchased life annuity payment
Where your savings income exceeds the Saving Allowance, you will have to pay tax on the excess and HMRC are collecting this through the tax code in the usual way. To enable them to work out an individual’s tax code, HMRC uses information from banks and building societies. However in some cases HMRC have been overestimating the amount of interest people are likely to earn and adjusting tax codes incorrectly. If you are not sure if your tax code is correct, please contact us for advice.
The new dividend tax and savings allowance mean it makes sense to look at the allocation of investments between spouses and civil partners.
If just one partner has investments generating dividends or savings it could be beneficial to transfer part of the investments to the other partner to ensure they receive income which utilises their dividend allowance or savings allowance.
Any transfer of assets between husbands and wives or between civil partners who are living together can be made without any capital gains tax being charged.