Tax on dividends is set to rise on 6 April 2016, but if the government includes anti-avoidance measures in the 2015 Autumn Statement it could apply sooner in some situations. So should you pay yourself extra dividends now?
The 2015 Summer Budget included the shock announcement that, from 6 April 2016, the tax rate on dividends will increase by 7.5%. It wasn’t all bad news though. The tax credit (equal to 1/9th of a dividend) which increases the taxable amount will be abolished. Also the first £5,000 of dividends you receive will be tax free. This means investors who receive modest dividend income will be better off. The government’s real targets for the higher tax are owners of small to medium-sized businesses who take a large part of their income as dividends.
How will the new tax work?
The Summer Budget announcement seemed simple enough, but when experts looked closer at the £5,000 dividend allowance it wasn’t clear how it would apply to higher rate taxpayers. In fact, the position was so unclear that HMRC issued a notice explaining how it expects it to work . Despite this questions remain, especially over how the dividend allowance will interact with the new savings allowance which also comes into effect in April 2016. However, more guidance is on the way.
If the government follows its usual timetable we can expect more information about the new dividend tax rate and allowance in the Autumn Statement, which is scheduled for 25 November 2015. The Finance Bill 2016 , which will contain the detailed rules, will be published soon after. At that point it will be possible to pin down exactly how the new dividend tax rate will apply.
It seems sensible for director shareholders to pay themselves extra dividends before the higher tax rate comes into effect in April 2016. However, the Chancellor could try to block this tax dodge by announcing anti-forestalling measures to take effect on the day of the Autumn Statement. We think it’s unlikely, but it can’t be ruled out.
Get your timing right
If you pay extra dividends to beat the Autumn Statement or 6 April 2016, timing is important. Company law determines the date dividends are treated as paid, which is also the date of payment for tax purposes. There are different rules for interim and final dividends.