Dividend Tax Reform: What Small Businesses Need to Know

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The word Tax on a cork notice boardThe Chancellor George Osbourne announced in the summer budget a reform of the way dividends are taxed. This will have a direct impact on many small businesses in Essex.

Tax-free Dividend Allowance

From April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance. The Dividend Allowance means that you won’t have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have.

The allowance is available to anyone who has dividend income.

Changes to headline rates 

Headline rates of dividend tax are also changing.

You’ll pay tax on any dividends you receive over £5,000 at the following rates:

  • 7.5% on dividend income within the basic rate band
  • 32.5% on dividend income within the higher rate band
  • 38.1% on dividend income within the additional rate band

This new system will mean that those with significant dividend income will pay more tax. Investors with modest income from shares, will see either a tax cut or no change in the amount of tax owed.

Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an Individual Savings Account (ISA), will continue to be tax free.

From April 2016 you have to apply the new headline rates on the amount of dividends you actually receive, where the income is over £5,000 (excluding any dividend income paid within an ISA).

The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive.

Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.

You can find some good working examples on the HMRC website.

Help for Essex businesses

Are you a small business based near or around the Brentwood, Chelmsford or Billericay areas and have questions on the dividend allowance and how it affects you? Get in touch to speak to our Chartered Accountant who can answer any questions you may have.

About Us

Nine Ashes Bookkeeping is a local, independent bookkeeping and accounting firm which specialises in bookkeeping and accounts for small businesses. Based in Ingatestone, we have clients from across Essex and can help with a wide range of services including tax advice, bookkeeping, payroll and year end accounts production.