Dividends. From April 2016 the notional credit system (which sees basic rate taxpayers pay no tax on dividends) will be scrapped, and instead a new dividend allowance of £5,000 will be introduced. Anything received above that will be taxed at 7.5%, 32.5% and 38.2% for the basic, higher and additional rates respectively.
HMRC has now confirmed that all taxpayers, regardless of their marginal rate, will benefit from the first £5,000 of dividend income tax free – essentially it is a special type of personal allowance.
One-man companies will be severely affected by this. Those following the traditional advice of taking a notional salary and topping up to the basic rate band with a dividend will see their tax bill increase by around £1,800 – enough to trigger payments on account.