HMRC issues dividend allowance factsheet

The government has issued a factsheet outlining how the new tax-free dividend allowance will operate when it comes into force on 6 April 2016. The allowance is available to anyone who has a dividend income. The new rules ensure that tax will not be payable on the first £5,000 of the dividend income irrespective of what non-dividend income is present.

From April 2016 new rates will also be introduced on dividend income over £5,000 as follows:

• 7.5% on dividend income within the basic rate band;
• 32.5% on dividend income within the higher rate band; and
• 38.1% on dividend income within the additional rate band.

The factsheet provides six examples of different circumstances demonstrating how the allowance would work in practice. HMRC claims that only those with significant dividend income will pay more tax, while an investor with modest income from shares will see either a tax cut or no change in the amount of tax payable. The rationale behind the changes is to deter small businesses from using companies where directors would remunerate themselves by paying dividends rather than take a salary. See www.bit.ly/1KteFrF.