Pre – Budget Dividend Focus

Ahead of the Autumn Statement tomorrow we are taking a deeper look at one of the biggest changes to come out of the 2015 Summer Budget which has been widely reported, namely the new regime for the Taxation of Dividends. For those with significant dividend income, this will have a material  impact on their income tax liabilities for the tax year 2016/17 and onwards. Ignoring the impact of the tax free dividend allowance of £5,000, the effective rates of tax may be summarised below:

    Effective   Effective
Income   Dividend  Rate   Dividend  Rate
Tax Rate   2015/16   2016/17
20% 0 7.5%
40% 25% 32.5%
45% 30.56% 38.1%

For owner managers who extract profit from their companies by way of dividend this represents a considerable change.  Accordingly, in all cases some planning is required even if the decision is to do nothing. In most instances what will need to be considered  is an assessment as to whether dividends that would otherwise be drawn after 5 April 2016 should be brought forward and drawn in the current tax year to gain the benefit of the current tax rate regime.  Evidently this will accelerate the payment of income tax liabilities on such income but this cash flow disadvantage should be outweighed by the benefit of forestalling the increased rates. The ability to accelerate dividends can be dependent on business and other commercial factors, as well as tax and the availability of distributable reserves. Each case will need to be assessed on its own merits and carefully planned to the end of the current tax year. If dividends are to be accelerated it is vital that they are properly “voted ” or “paid” so that they cannot be challenged if examined as part of any tax enquiry. It is recommended that consideration be given to this issue with some urgency so that there is plenty of time to assess and plan. It should therefore be put on your agenda now.  To discuss your position and options further, please feel free to contact us.