A dividend is a distribution of profit reserves by a company to its shareholders, and often represents a more tax-efficient method of remunerating a company’s management than through the payroll alone. The usual form of such distributions is in cash but can also constitute the issue of new shares in forfeiture of physical payment.
HMRC conducted a fundamental change to the way in which dividends were taxed from April 2016, abolishing the notional 10% tax credit and introducing a nil rate band of £5,000 per year for 2016/17 and 2017/18. The rates of tax also changed with basic, higher and additional rate dividends now suffering tax at 7.5%, 32.5% and 38.1% respectively.
For the avoidance of any doubt on the taxpayer’s part, the direct impact of the abolition of the tax credit is an overall increase in the effective rate of tax. Although this is partly mitigated by the nil rate band allowance, this will come as little consolation to those individuals drawing dividends at significant levels. It will also see a number of taxpayers who historically restricted such levels to the basic rate, where they were effectively tax-free, realise a self-assessment liability for the first time in January 2018.
Unfortunately, there is further gloom on the horizon as HMRC have already confirmed that the nil rate band allowance is to be reduced to £2,000 from 2018/19. In the interests of a balanced perspective, however, there is the positive that taxpayers are no longer required to gross up such payments for reporting purposes, thus simplifying the self-assessment process somewhat.
“ HMRC conducted a fundamental change to the way in which dividends were taxed from April 2016 “
In summary, the nil rate band allowance will be welcomed by those recipients taking a relatively low level of dividends, and with effective tax planning, this can certainly be a useful tool for close companies. From a quantum perspective, the changes will undoubtedly have the greatest impact on those drawing dividends at the higher or additional rates but I can’t help but feel that it will be the basic rate shareholder receiving an unexpected bill just after Christmas who suffers the most.
Lisa Garfinkle – Barrons