Update on the changes to the taxation of dividends

20 October 2015 • Tax Videos

Radical reforms to the dividend taxation system were introduced in the July 2015 budget which will take effect from the 6th April 2016. The most important effect is that the effective tax rate will increase by 7.5% across all bands. To illustrate, effective tax rates before, and on or after this date will be as follows;

  Old Regime - Nominal Old Regime – Effective New Regime
Basic Rate 10.00% 0.00% 7.50%
Higher Rate 32.50% 25.00% 32.50%
Additional Rate 37.50% 30.60% 38.10%

There are however two favourable changes.

  • Firstly the tax credit system is being abolished which means the end of ‘grossing up’. This system is why under the old regime, £9,000 of dividends actually counted as £10,000 for tax purposes. The practical effect of this change is that thresholds and bands will now be approached and crossed more slowly for a given level of physical distribution.
  • Secondly there is going to be a new tax free £5,000 dividend allowance which means that the first £5,000 of dividend income is effectively zero rated within whichever band it happens to sit.

Illustration 1

How someone with gross income of £100,000 will be affected

Say that a person with an owner managed business kept their gross income at £100,000 (so as not to lose their personal allowance). The old typical setup would have been to draw a salary of £8,000 with a net (i.e. ‘actual’) dividend of £82,800 (which translates to £92,000 grossed up – i.e. for tax).

We can see that in this case that the person would be £4780.37 worse off.

Illustration 2

Under the new regime however, the person might want to increase their dividends by £9,200 as with the abolition of ‘grossing up’, drawing £92,000 dividends would simply count as £92,000 for tax purposes. Therefore the person could physically receive £100,000 overall without starting to lose their personal allowance.

We can see that in this scenario the person would be £3,818.15 worse off. This is however a lower differential than the previous example.

Comparison of overall tax rates

We have developed a spreadsheet system which can test various scenarios, so if you think that these changes could affect you and your business, please call 020 7731 6163 to talk to one of our tax team. You can also download our updated 2015 / 2016 tax card.

 

A testing time for Team Warrener Stewart as they tackle Tough Mudder, Winchester

09 October 2015 •

True grit and determination took on a new meaning for the nine plucky team mates from Warrener Stewart who swapped crunching numbers for being well and truly counted in darkest, muddiest Hampshire! Keen to see if they could cope with the conditions on the notorious Tough Mudder obstacle course, Warrener Stewart staff, led by joint managing director Nick Morgan, took part in this grueling team event.

Whilst many enjoyed the late September autumn sunshine, the intrepid nine from Warrener Stewart pictured above, (L-R); Nick Morgan, David Collins, Mark Cook, Victoria Dent, Felicity Butler, Ashleigh Molton, Liz Henry, Ryan O’Connor and Marcus Bullen, pushed themselves to physical and mental limits. As Nick noted, some of the obstacles were extremely challenging with many of the team being forced to confront some of their worst fears simply to complete the very Tough, very Muddy and very Long (12 mile) course.

“My thanks go out to all of the crew for being such a great team and pulling together so tightly, it was an incredible achievement to get us (not least me) to the finish,” concedes Nick. “It was very tough indeed, much tougher than I had been expecting, but as the man said, the clue was in fact in the name!!”

David Collins takes 'being cool' to new limits.

 

“Warrener Stewart understands our business; they give us more than any other Accountancy service we have ever received in the past. They are extremely commercially aware and very current when it comes to changes in tax policy. ”
Diana Hoare - Anderson Hoare