The notional 10% tax credit on dividends will be abolished. All tax payers will be entitled to a £5,000 tax free dividend allowance. Any dividends above this amount will be tax at 7.5% up to basic rate, 32.5% at the higher rate and 38.1% at the additional rate. Dividend income will be treated as the top band of income and any individual with dividend income of £5,001 or more will be required to complete a self assessment tax return.
Dividend income that is received by ISAs or Pensions will not affected by the new regime.
The changes are designed to tax director/shareholders of small limited companies that pay a small salary to ensure entitlement to state pension is preserved topped up with a large dividend that helps reduce National insurance costs to the company.
It would appear that the HMRC are not in favour of small limited companies and the current low salary/high dividend pay structure that has become common place. On the face of these changes, it would seem that HMRC want small one man band companies to be self employed, however, there are still tax savings to be made from incorporating depending on income levels.
The HMRC has published a Dividend Allowance factsheet that can be accessed here.
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