As announced in 2015 in the Summer Budget, legislation will be introduced in the 2016 Finance Bill to repeal dividend tax credit, introducing a new Dividend Allowance and new rates of income tax on dividends. Effective from 6 April 2016, individuals will no longer pay tax on the first £5,000 of dividend income, no matter what non-dividend income a shareholder may earn. Dividends paid on shares held within pensions and ISAs will be unaffected and remain tax free. The rates of income tax on dividends received above the allowance will be changed to:
- 7.5% for dividends taxed in the basic rate band;
- 32.5% for dividends taxed in the higher rate band; and
- 38.1% for dividends taxed in the additional rate band.
The final contents of the 2016 Finance Bill will be subject to confirmation in the 2016 Budget.
Payment of dividends
The legislation covering how companies paying dividends or making other distributions advising shareholders of the funds they have received (contained within the Corporation Tax Act 2010) have broadly retained their existing content which means that a payment advice is still required, though removing the obligation to show the dividend tax credit.
To ensure consistency of messaging to shareholder and employee communities across the many different issuers and service providers it has been agreed by registrars that the ‘Tax Voucher’ will be replaced by a ‘Dividend Confirmation’ and will include the following information:
- Shareholder Reference;
- Record Date;
- Payment Date;
- Dividend Number;
- Payment Reference;
- Dividend Rate;
- Shareholding; and
- Dividend Payable.
‘Consolidated Tax Voucher’ and ‘Electronic Tax Voucher’ will be replaced with ‘Annual Dividend Confirmation’ and ‘Electronic Dividend Confirmation’.
Following the changes, we are recommending to Equiniti clients that they amend their dividend stationery to include the following wording to ensure shareholders are informed of the changes:
Dividend Tax Credit
From 6 April 2016 Dividend Tax Credit will be replaced with a NEW ‘Dividend Allowance’. To understand how you are affected by the changes and for further information visit the HMRC website: https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet.
And for those issuers who wish to give more information, a flyer is available which can be inserted into the dividend mailing.
Further shareholder education
HMRC has created a number of web pages that provide helpful advice including working examples of dividend related calculations to allow shareholders to see how they are affected.
Employee share plans – tax advantaged Share Incentive Plans
Specifically in relation to UK issuer tax advantaged Share Incentive Plans, our current understanding is:
- Cash dividends - The impact on participants receiving cash dividends on their plan shares aligns with those for shareholders with SIP dividend income counting towards the Dividend Allowance. There will be no tax to pay on the first £5,000 of dividend income.
- Reinvested dividends - The current income tax advantages linked to holding Dividend Shares continue, so reinvested dividend income will not count towards the annual £5,000 Dividend Allowance as long as Dividend Shares are held for three years or more, or taken out of the plan due to a ‘good leaver’ reason.
- Reinvested dividends, where participants withdraw their Dividend Shares before the end of the three-year holding period due to a ‘bad leaver’ reason - Reinvested dividend income received in the three years prior to leaving will count towards the participant’s current tax year’s £5,000 Dividend Allowance in conjunction with any other dividend income received within that tax year. There will be no tax to pay on the first £5,000 of dividend income.
All employee share plan documentation should be checked for any references to dividends and taxation and updated if needed.
This article was written by Stuart Ellen, Managing Director, Registration Services, Equiniti. For more information, please contact Stuart Ellen.