Change to the Taxation of UK Private Limited Company Dividends – Tax Residents of Australia

Significant changes are coming into effect in respect of the taxation of UK dividend income from the start of the next UK tax year on the 6th of April, 2016.

At present a dividend that is declared by a UK limited company is paid net of a 10% notional tax credit.

The tax credit is “notional” as it has no reference to the rate of corporation tax paid by the paying company, and it is not an amount that is repayable in the hands of the individual share holder if the individual’s personal income tax liability is less than the amount of the 10% notional tax suffered on the dividend.

As an example, at present a dividend received from a UK limited company of £900 is actually a gross dividend of £1,000 on which notional tax of £100 is deemed to have been suffered.

From the 6th of April, 2016 there will be no tax credit attaching to UK limited company dividends.

Instead UK residents will receive a dividend tax allowance of £5,000.

Dividends above this amount will be taxed in the hands of UK residents at 7.5% (basic rate taxpayers), 32.5% (higher rate taxpayers), and 38.1% (additional rate taxpayers), with dividend income taxed at the top slice of income.

Non-UK residents will be treated as having paid income tax at source at the dividend ordinary rate (7.5%). The amount treated as paid is not repayable, but relief for this tax is available when a dividend from the UK is received by a tax resident of Australia.

Many individuals who are tax residents of Australia continue to have shareholdings in UK limited companies, and in our experience some look to derive dividends from companies in which they have a more significant interest.

GM Tax has prepared computations looking at the tax situation in respect of dividend income received by Australian resident individuals before and after the 6th of April, 2016 – we are finding there is an advantage in receiving a dividend from a UK company during the current UK tax year, rather than afterwards.

For example, consider a taxpayer who is a resident of Australia with a marginal tax rate of 32.5%, who is subject to income tax on UK dividend income of £18,000 (equal to £20,000 gross under the present regime; £19,459 under the regime from the 6th of April, 2016):

Dividend received pre 06/04/2016
Exchange rate of 2.2
Dividend income = $44,000
Tax payable = $14,300
Less Foreign Income Tax Offset of $4,400

> Balance of tax to pay = $9,900

Dividend received on or after 06/04/2016
Exchange rate of 2.2

Dividend income = A$42,811

Tax payable = A$13,914

Less Foreign Income Tax Offset of A$3,211

> Balance of tax to pay = $10,703

=> Additional tax payable of A$803 (A$10,703 less A$9,900).

It should also be remembered that an individual who is not a tax resident of the UK will usually not be subject to additional UK income tax on dividend income received while non resident, so long as s/he does not resume tax residency in the UK within 5 years of departure.

Personal circumstances will affect the tax position, but we recommend that all who are in receipt of dividend income from a UK limited company – particularly those who may have an interest in a personal limited company in which the Australian resident was the sole shareholder, or who owned a UK limited company with a spouse or partner – give relatively urgent attention to the tax efficient extraction of funds.

GM Tax will be pleased to discuss your situation and how we might help in a no obligation conversation.