The New Dividend Tax Regime

Aug 2, 2015

The Summer budget totally changes the way dividends will be taxed next year.


The changes are simple enough in principle.  A Dividend Tax Allowance exempts £5,000 of dividend income from income tax and then further dividend income is taxed at 7.5% for basic rate taxpayers and 32.5% for higher rate tax payers.

For most small business owners who have traditionally paid themselves with a mixture of salary and dividends, they have enjoyed the ability to receive those dividends without incurring a personal tax bill.  From April 16, after the first £5,000, tax will be payable at at least 7.5% on dividend income, costing for most on average around £2,000 per year.

It will still more tax efficient to trade as a limited company rather than a sole trader.  The tax savings will be less than they used to be, but there will still be an annual tax saving.

There will also still be a benefit for a director-shareholder to take a dividend rather than a salary, though again the amount of tax saved will be less than under the current regime.

Business owners should look at the amount of dividends that they take from the company before 5 April 2016 to ensure maximum tax savings are made before the new regime is introduced.

If you would like any further information on the new regime please contact Rosie Forsyth at Wilkins & Co.

Please note that the above is based on information currently available.  There has been no draft legislation yet on the new regime and no details as to how the allowance will interact with the other allowances.  All we definitely know is personal tax bills for most hard working small business owners will increase!