The dividend shake-up in July’s Budget

Reflecting on the Chancellor’s recent Budget…Changes to tax policy on dividend income could have significant implications.

The July 2015 Budget saw the introduction of a 7.5% income tax charge on dividend income received from 6th April 2016. If you’re an owner of a family company, this may well influence the way you plan to draw your income in the future.

There will be an exemption applicable to the first £5,000 drawn, but the excess attracts a 7.5% charge for basic-rate taxpayers, a 32.5% charge for higher-rate taxpayers and a figure of 38.1% for additional-rate tax payers. This certainly eats into the attractiveness of national insurance savings under the current regime.

One option is to accelerate dividends into the current tax year, but it’s likely that some shareholders may opt to borrow from their companies in the future, rather than draw income. These borrowings do attract a tax charge, but it is assessed at 25% and is paid by the company, not the individual. The individual will suffer an annual benefit-in- kind tax charge on the total loan, which will amount to 1.3% of the loan for a 40% taxpayer, and just over 1.45% for a 45% taxpayer. This liability will also be a debt on the individual’s estate for inheritance tax.

Of course, this specific approach may not be appropriate for everybody. It’s important to talk to your accountant about the options, now that the full implications of the Budget decision are being fully analysed and digested.