Dividend rates refreshed in wake of HMRC factsheet

A chartered adviser to contractors has updated its guidance on dividend taxation rates for 2016-17, to take account of the potentially band-changing factsheet from the taxman.

Moore Stephens said that, like most advisers, it took the £5,000 dividend allowance to mean that the taxable income on dividends would reduce, similar to how the personal allowance operates.

But in the HMRC factsheet, published nearly six weeks after the measure was announced in the Budget, it says the £5,000 voucher will not reduce the level of taxable income for an individual. 

“This therefore means that, in effect, the first £5,000 of dividends have a 0% tax rate, but still form part of someone’s taxable income,” Moore Stephens clarified.

“The impact of this on a higher rate taxpayer is that the level of dividends taxed at the basic rate is reduced but it puts an extra £5k of dividends into the higher rate of tax...thus increasing their tax liability.”

Another contractor tax specialist, BKL, confirmed: “The HMRC factsheet does indeed make it clear that the £5,000 allowance does not operate in quite the way that was implied by the Budget”.

This “huge surprise” - as it has been described - is much to the disadvantage of any individual who pays the higher rate of tax, says BKL’s tax technical director David Whiscombe.

Stuart Rob, partner at accountants Baker Tily, reflected: “Dividends within your allowance will still count towards your basic/higher or additional rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.”