New dividend rules make Employee Shareholder Status more attractive

From 6 April 2016 the dividend tax credit is being replaced by a £5,000 tax-free dividend allowance, with rates on income above that as follows:

Basic rate taxpayer: 7.5%
Higher rate taxpayer: 32.5%
Additional rate taxpayer: 38.1%

This is generally being hailed as bad news and it is generally bad news for owner managers who have historically enjoyed dividend rates that are low compared to salary.

But this is not all bad news. Employee shareholders can now benefit from £5,000 of tax free dividends which previously would have been taxed at marginal rates. In the current tax year a higher rate taxpayer would pay £1,250 tax on a £5,000 dividend but next year no tax would be payable on this.

Maybe this point will tip the balance for employers who are considering introducing employee shareholder status shares as part of their remuneration structure (this is an initiative introduced by George Osborne which allows employees to be issued with shares with a value between £2,000 and £50,000 and any gain can be realised tax-free in the future). The ability for employees to receive £5,000 annually tax-free is certainly an attractive by-product of the new rules. Clearly the value of this would be eroded to the extent that employees are already receiving dividends from their private investments.

 

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