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Tech centre - Financial planning bulletin

Dividend Taxation from 6 April 2016

May 4, 2018, 12:23 PM

Summary


As announced in the July 2015 Summer Budget the taxation of dividend income changed on 6 April 2016. From this date people are taxed on the actual dividend they receive and the previous system of receiving a net dividend with an attaching 10% credit and grossing up no longer applies. In this article we look at how the system operates for all types of taxpayers and consider the planning opportunities resulting from this system of dividend taxation.

Facts and analysis


The position up to the 5 April 2016

Prior to 6 April 2016 when a company declared a dividend of say 90p from its taxed profits this was notionally grossed up to 100p. When paid it was netted back down to 90p with a 10% tax credit. For basic rate tax payers the 10% credit discharged their liability. Higher rate and additional rate taxpayers were liable at 32.5% and 37.5% respectively on the notional gross dividend but could use the 10% credit to reduce their liability. So higher rate taxpayers suffered an effective rate of 25% and additional rate taxpayers 30.55% on the net dividend regardless whether it was physically paid or accumulated.

The position after 6 April 2016

From 6 April 2016 dividends are no longer grossed up with a 10% credit. Individuals are now be taxed on the actual dividend amount they receive. At the same time a new tax free dividend allowance of £5,000  was introduced (the allowance was subsequently reduced to £2,000 from the 2018/19 tax year).  Amounts above the dividend allowance are taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. All dividend income including that falling in the tax free allowance is part of ‘total income’ for other reducing tax thresholds, such as child benefit tax (£50,000) and personal allowance (£100,000). Under the new system no tax is deducted at source so all taxpayers must use self assessment to pay any tax due.

The way that dividends are paid by companies didn't change and any distribution is paid from the company’s post tax profit. Even though the 10% tax credit no longer exists, all things being equal, if a company paid a dividend of £100 net in 2015/16 it will pay £100 in 2018/19. The table below illustrates the value of a £100 net dividend with grossing up under the old system with the same £100 dividend under the post 6 April 2016 regime.

Taxpayers marginal rate of income tax

Up to 5 April 2016 value of net £100 dividend with
10% credit
(ie £111.11 gross)

Post 6 April 2016 value of £100 dividend
(up to £5000 in 2016/17 and 2017/18, £2000 post April 2018)

Post 6 April 2016 value of £100 dividend
(£5001 and above in 2016/17 and 2017/18, £2001 post April 2018)

Non taxpayer*

£100.00

£100.00

£100.00

Basic rate taxpayer

£100.00

£100.00

£92.50

Higher rate taxpayer

£75.00

£100.00

£67.50

Additional rate taxpayer

£69.45

£100.00

£61.90

* Dividend income is eligible for the personal allowance so someone with no other income in 2018/19 could have £13,850 of dividends without paying tax. The first £11,850 would be covered by the personal allowance and the next £2,000 by the tax free dividend allowance.

Individual Investors – Winners and Losers

For basic rate taxpayers receiving less than £2,000 of dividends the new regime makes no difference to them. Basic rate taxpayers receiving more than £2,000 in dividends are worse off, especially those individuals who have incorporated and remunerate themselves through dividend extraction maximising the basic rate band with dividends rather than salary. For those nearing age 55 making a pension contribution may look an attractive way of taking profits from the business. Higher rate and additional rate taxpayers with £2,000 or less in dividend income are better off. Previously they had an additional 25% (higher) or 30.55% (additional) extra to pay on the net dividend they received. Now they pay no tax thanks to the £2,000 tax free allowance. However, there will be a cross over point where the benefit of the tax free allowance is outweighed by the higher rates on dividends in excess of the allowance.

ISAs and Pensions

Pension plans (personal or occupational) and ISA managers are unable to reclaim the tax credit attaching to dividends so they amount they receive won’t actually change. As previously mentioned the grossing up, netting down and tax credit are all notional. Dividends received post 6 April 2016 (all other things being equal) are the same as the net dividend received before the 5 April 2016. Obviously the tax free dividend allowance doesn't apply because the recipient of the dividend is the pension scheme / ISA manager rather than the individual.

Trusts and Estates

The £2,000 tax free dividend allowance only applies to individuals. Trustees of discretionary trusts in receipt of dividend income after the 6 April 2016 pay tax at 7.5% on the amount falling within the £1000 standard rate band. Above this threshold the additional rate of 38.1% applies. Trustees of interest in possession trusts where the beneficiary has an absolute right to trust income should be able to avoid any liability on dividend income by mandating it directly to the entitled income beneficiary. Executors / Personal Representatives receiving dividends during the administration of the estate are liable at 7.5%.

Companies and Onshore Life Funds

There are no changes to the taxation of dividends received by corporate investors. They continue to be treated as franked investment income without any further liability to tax for the company. Similarly dividends received by UK insurers after 6 April 2016 do not suffer any corporation tax within their policyholder funds which means no change from the position up to the 5 April 2016.

Next steps


The changes to dividend taxation from 6 April 2016 bring financial planning opportunities and reasons to engage with clients, consideration should be given to reviewing and discussing the following:

  • Maximising the benefit of the £2,000 tax free dividend allowance
  • Reviewing the taxation of the underlying asset classes within a portfolio to ensure that each is held in the most efficient tax wrapper for the client.

Many clients who are owner managers of their own companies have taken remuneration in the form of dividends. In these circumstances a review should be undertaken, maybe giving consideration to the company making a pension contribution as an alternative strategy, particularly if the business owner is nearing age 55. For clients who are fully using their tax free dividend allowance alternative planning strategies will have to be considered for the income tax on the dividends they receive from their personal investments.

Learning outcomes and reflective questions for CII accredited CPD


Reading this article can count towards structured CPD under the CII CPD Scheme if you consider the Learning Objectives below to be directly relevant to your own personal professional development plan. The Reflective Questions don’t require answering, they are aimed to help you reflect on the issues raised in the article for your reflective statement on your CPD Certificate.

Learning objectives:

  • To understand the new regime for taxing dividend income from 6 April 2016
  • To understand the taxation of the different asset classes
  • The importance of the interaction of fund taxation and wrapper taxation

Reflective questions:

  • When constructing portfolios for clients how can the return from assets generating savings income be maximised?
  • When constructing portfolios for clients how can the return from assets generating dividend income be maximised?
  • What are the potential administration issues when rebalancing a portfolio of directly held collective investments?

Important information


The information contained in this article has not been approved for use with customers and is based on Aviva’s interpretation of current law and legislation, and our understanding of HM Revenue & Customs (HMRC) practice as at 6 April 2018. It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice. Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients. You should always seek appropriate legal or other professional advice 

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