PIERCE VIEW: Personal Taxes & Dividends

Personal Taxes

The personal allowance will increase from April 2016 to £11,000, and from April 2017 to £11,200 with the aim of increasing the personal allowance to £12,500 by the end of the present parliament. In future, legislation will link the personal allowance with the living wage so anyone earning the living wage and working for 30 hours a week will not pay income tax.

The basic rate tax threshold will be raised from April 2016 to £43,000 with a pledge to raise it to £50,000 by the end of the current Parliament.

Dividends

This measure came as a genuine surprise as there had been no advance leaks. The way in which dividends will be taxed from April 2016 will change fundamentally, with the greatest impact on shareholders of OMBs taking a low salary and topping up their remuneration with a dividend. At the moment there is little in the way of detail. What is clear is that the decision to pay dividends instead of salary is more marginal. ISAs and pension funds will not be affected.

Every taxpayer will be entitled to a tax free dividend allowance of £5,000, and the dividend tax credit will be abolished so it will not be necessary to gross up a dividend to calculate the tax. A basic rate taxpayer will pay tax on a dividend at 7.5%, a higher rate taxpayer at 32.5% and an additional rate taxpayer at 38.1%. Anyone with dividend income of more than £5,000 is likely to pay more tax compared with the current system.

There may be merit in bringing forward dividend payments before 6 April 2016, no doubt providing the Chancellor with an anticipated boost to tax receipts in January 2017!