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Dividend taxation: All change

Lindsey Wicks looks at how the new dividend taxation rules fit together.

The chancellor announced fundamental changes to the taxation of dividends in the Summer Budget 2015. My briefing in January 2016 TAXline provided a reminder of the practical steps when paying dividends. This article looks at how the new tax rules will apply and provides some examples of the impact on taxpayers.

Calculating the Dividend Tax Rate

The 1/10th notional tax credit that has applied to dividends since the abolition of advance corporation tax (ACT) in 1999 is to be replaced by a £5,000 dividend nil rate band from 6 April 2016. This spells the end of grossing-up calculations and explaining the difference between the actual rate and effective rate of tax on dividend income for individuals.

The Summer Budget 2015 and the factsheet subsequently issued by HMRC on 17 August 2015 referred to a £5,000 dividend allowance. However, by the time the draft clauses of the Finance Bill 2016 were released on 9 December 2015, this term had been replaced by the dividend nil rate band.

In short, the £5,000 dividend nil rate band is set against income taxed at the dividend ordinary rate, dividend upper rate or dividend additional rate (in that order) and can overlap across bands. To achieve this, the draft clauses insert new s13A, Income Tax Act 2007 (ITA 2007) which contains three steps, each with a number of rules to determine the rate of income tax that should be applied to dividend income.

The dividend tax rates

In addition to the introduction of the new 0% tax rate (the dividend nil rate), it was announced in the Budget that the dividend ordinary rate and the dividend additional rate would be changing.

In what appears to be an oversight, draft clause 2 of the Finance Bill 2016 only inserts the dividend nil rate into s8, ITA 2007 and does not amend the dividend ordinary rate or the dividend additional rate. As the proposed new rates were announced again in the Overview of Legislation in Draft document that was published alongside the draft clauses on 9 December 2015, it is assumed that this mistake will be remedied by the time that Finance Bill 2016 is published before Easter.

This is an extract from an article in the February 2016 edition of TAXline, the magazine of the Tax Faculty.

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