Many family-owned companies allocate dividends towards the end of their financial period and/or the tax year, which means that the reduction in the dividend allowance from £5,000 to £2,000 can have a significant impact on income tax liabilities of an individual. Taxpayers may not be aware of this change in the dividend allowance until they complete their 2018/19 self-assessment return, which under normal circumstances, will be due for online submission to HMRC by 31 January 2020.
Tax payable on dividend received will principally depend on which tax band the first £2,000 falls in. The tax rates above the dividend allowance remain unchanged, at 7.5% for basic rate taxpayers, 32.5% and 38.1% for higher and additional rate taxpayers respectively.
For a basic rate taxpayer, this reduction in the allowance will mean an increase in tax liability payable on dividends of £225. A higher rate taxpayer will be liable to an increase of £975 in their annual tax bill on dividends, and additional rate taxpayers, the surge in tax payable is £1,143. If dividend income falls between multiple tax bands, those figures will differ.
The allocation of various rate bands, tax rates and allowances can be complex, even in circumstances where a relatively straight-forward dividend payments are made. Family business structures may be particularly vulnerable to the impact of the reduction in the dividend allowance, especially where multiple family members take dividends from a family company to utilise the dividend allowance.
If you think you may be affected by the changes in dividend allowance, please get in touch with us at firstname.lastname@example.org