Planning for the long-term effects of dividend tax changes

Planning for the long-term effects of dividend tax changes

John Hodgson, head of tax and business services at the Birmingham office of Smith & Williamson, the accountancy, investment management and tax group, discusses the imminent dividend tax rises and the importance of acting now to minimise the longer-term impact.

With the 7.5% tax hike on dividends of over £5,000, received by individuals, coming into effect in April, most company directors and investors will have taken advice on the immediate issues.

However, there hasn’t been as much discussion around the longer term effects which, for many, could be quite considerable.

The tax increase will be most keenly felt by those who receive ‘significant’ dividend income outside of tax-efficient wrappers such as pensions, ISAs or Open Ended Investment Companies (OEIC). Broadly speaking, this means those with investment portfolios of £750,000 and above, or those who take dividends from their limited company, will be most affected. Careful planning now could help to protect assets and income in the longer term.

How to respond

If you own or manage a company, your accountant or lawyer may have advised you to bring forward your dividend payment to before the 6 April deadline, provided the necessary Companies Act requirements are met, although later legislation may include forestalling provisions. For example, if a £200,000 annual dividend is usually paid, you might be able to increase this to say £600,000 before April, with plans for reduced dividends over the next few years. However, this response needs careful thought, as it could leave your business short of funds to invest or meet other liabilities. Furthermore, it’s perhaps time to consider a strategic restructuring of your business, to better match your long-term commercial and family aspirations to the outcome.

The key is not to think about the dividend changes in isolation, but instead to understand the context and impact on you and your company’s finances for the medium and long-term.

It is highly advisable to conduct a review which addresses the following points: