We may only be a few weeks into the New Year, but ‘change’ is emerging as a solid theme for 2016.
Already a newly appointed First Minister has demanded "a new way of doing business", whilst research has revealed an encouraging increase in local investment transactions and analysts have welcomed an acceleration in new business expansion.
For the business community, the changes will not stop there. On 6 April 2016, significant modifications to the Dividend Tax Regime will come into effect.
Dividend income forms a significant part of total income for many business owners and investors. With only weeks left to the end of the 2015/16 tax year and income tax payments due on 31 January, now is an opportune time to become familiar with the impending changes.
Very simply, the altered regime will see the abolishment of the 10% notional tax credit and the introduction of a tax free allowance by way of compensation.
At present, dividends carry a 10% notional tax credit meaning that basic rate tax payers pay no income tax on dividend income; higher rate tax payers pay an effective rate of 25%; and additional rate tax payers (with taxable income over £150,000) pay an effective rate of 30.6%.
With the notional tax credit no longer applicable from 6 April, new higher income rates will be applied to dividends. For basic rate taxpayers the previously non-existent rate will now be 7.5%; for higher rate tax payers this will increase to 32.5%; and to 38.1% for additional rate tax payers.
To compensate in part for the loss of this tax credit, a tax free allowance of £5,000 will be introduced. This means that the first £5,000 of dividend income will not be taxed regardless of the tax payer’s other non-dividend income.
Dividends within this new tax free allowance will still count towards the tax payer’s basic or higher rate income tax band once the tax payer has utilised their personal allowance. In such circumstances, tax payers will therefore need to be conscious that the amount of any dividend received (even within the tax free allowance of £5,000) could have a direct impact on the amount owed to HMRC for income tax.
With just over two months remaining until the changes take effect there is still time to consider opportunities to mitigate personal tax liabilities and any additional tax due, ensuring affairs are structured in the most tax efficient manner. For example, maximising ISAs or the annual tax free dividend allowance and using pension contributions to increase the basic rate band.
If you, or your colleagues, will be affected by these new measures, you should seek guidance from a professional who can advise on the options available to best manage the changes.