HMRC clarifies dividend tax

Friday 21 August 2015

Her Majesty’s Revenue and Customs (HMRC) has issued additional guidance on how the new rules on the dividend tax will be applied when it comes into force in April 2016.

Many accountancy experts had previously thought that the new rules would include a £5,000 tax-free allowance on top of existing allocations when the news was announced in chancellor George Osborne’s summer Budget in July.

However, HMRC has now published a Dividend Allowance factsheet on its website. This document explains that the £5,000 allowance is actually a zero-rate band, meaning that amounts covered under the allowance still contribute to total taxable dividends.

Dividends will be taxed at 7.5 per cent within the basic rate band (up to £32,000), 32.5 per cent within the higher rate band (£32,000 to £43,000), and 38.1 per cent within the additional rate band (£43,000 or more).

The factsheet explains: “This simpler system will mean that only those with significant dividend income will pay more tax.

“If you’re an investor with modest income from shares, you’ll see either a tax cut or no change in the amount of tax you owe.”

Dividends received as part of a pension fund or from an ISA will not be included in the new rules, but share portfolios that include companies that pay dividends will be covered, according HMRC.

It is believed that the new dividend tax will raise £6.8 billion over the course of this Parliament for the Treasury.

The changes are likely to affect self-employed people operating as limited companies, who have often been able to enjoy minimal amounts of tax by paying themselves primarily in dividends.

However, many higher earners will be eligible to pay higher levels of tax under the new rules. Part of the summer Budget was the promise of a so-called “tax lock”, which was a pledge not to raise income tax, VAT, or National Insurance, but the dividends tax seems not to be considered a breach of this commitment.

While paying tax is an essential (although possibly unpopular) part of being self-employed, any freelancers who are concerned about how the changes will affect them should consult with a specialist contractor accountant to make sure that they are taking full advantage of their tax-free allowances, and are prepared for the new system to come into effect.

However, it should be noted that the latest factsheet is merely guidance, and the final details will not be confirmed until the upcoming Finance Bill has completed its passage through Parliament. This piece of legislation is scheduled for readings next year.

This means that any financial advice given before this information is made public has the potential to be inaccurate. Make sure you stay in regular contact with your accountant, so that you can be kept up to date on the ways in which the new dividends tax is likely to affect you.

By Victoria McDonnell

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