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Dividends: It’s not just the tax cost

In last month’s Budget the Chancellor announced a reduction in the dividend tax free allowance from £5,000 to £2,000.

This will affect those running their own businesses via a limited company and also those with substantial dividend investment income.

However, the greatest impact is likely to be on those who are basic rate taxpayers with dividend income in that £2,000 to £5,000 band.

This is a group of taxpayers, mainly retired, who are unlikely to be completing self-assessment tax returns at present.

Up until April 2016 they enjoyed the dividend tax credit and in the past year benefited from Mr Osborne’s nil rate band of £5,000. But in one year’s time, from April 2018, the dividend tax rate of 7.5% will kick in at £2000, which means an extra tax bill of £225 for anyone with £5000 of income.

There is a requirement to contact HMRC before 5 October 2019 to tell them about this new liability, and anyone affected will probably be asked to complete a self-assessment tax return.

Financial advisers and fund managers are likely to have a number of clients affected by this change, which will have an administrative as well as a tax cost. This makes effective planning vital.

Meanwhile coming down the track is Making Tax Digital, which is due to be fully implemented from April 2020. HMRC anticipates that this will enable discretionary fund managers to notify them of their client’s dividend income regularly, through the year.

So there could in future be an unpleasant surprise on the doormat in the form of penalties, for those taxpayers who fail to notify HMRC of their liability as a result of these changes.

Liz Beadsley, Senior Associate

Published: 3 April 2017

A moment of clarity

April 2017

Key Contact

Liz Beadsley