For many years it has been a standard tax planning strategy for couples in a marriage, civil partnership or other relationship to arrange as far as possible that household income is allocated in such a way as to maximise use of personal allowances, basic rate bands and other reliefs. Now that working outside the home is almost universal, “wife’s wages” are not quite as common as they once were; but splitting ownership of the family company and paying dividends tax-efficiently remains widespread.
Despite the changes to taxation of dividends which are to be introduced from 6 April 2016, it will normally remain tax-efficient to split income in this way and to pay dividends to spouses and partners. But the introduction of the 7.5% basic rate tax charge on dividends will particularly affect those clients whose only substantial source of income is basic rate dividend income from a private company (typically “stay-at-home” or lower-earning spouses or partners).
Until now, such clients have had no tax to pay (the tax liability being covered by the “tax credit” attaching to the dividend) and very often have not even had to file a tax return. But from the tax year 2016-17 there will be returns to file and tax to pay unless the dividends and other income are covered entirely by allowances including the £5,000 dividend nil rate band. To avoid nasty shocks when the tax bill comes in, clients will need to bear this in mind when voting dividends after 5 April 2016.
For more on how dividend changes may affect you or your partner, especially if you are in this position, please get in touch with your usual BKL contact or use our enquiry form.