Various changes are being made to the tax system as the consequences of government decisions regarding the financial situation across the country impact on individuals and their personal circumstances. One area where people will experience significant change is with regard to the Dividend Tax Credit and the newly introduced Dividend Allowance. What is the Dividend Allowance? In simplest terms, the Dividend Allowance will replace the Dividend Tax Credit. This is due to take place in April 2016. What this means in practice is that you will not have to pay tax on the first £5k of your dividend income. This basic principle applies to anyone who has dividend income and it does not matter what non-dividend income you happen to have What else is changing? It is also important for people in these circumstances to be aware of the forthcoming changes to headline rates of dividend tax. These are the new tax rates that people will be liable to pay on any dividends they receive over £5k:

• 5% on dividend income within the basic rate band
• 5% on dividend income within the higher rate band
• 1% on dividend income within the additional rate band

It is worth noting that dividends received by pension funds are exempt from tax, and dividends received on shares held in ISAs will also continue to be tax free. What does this mean for me? The key date to make a note of is April 2016 as this is when the new headline rates on the amount of dividends an individual receives, where the income is over £5k and not including dividend income paid within an ISA, will apply. While it means that your first £5k received from dividend income will not be taxed, the newly introduced Dividend Allowance will not be deemed to have reduced your income for tax purposes. Anything you receive within the £5k allowance will count towards basic or higher rate tax bands so this may affect the rate you pay on dividends over the £5k allowance. Why is this happening? The idea is to introduce a simpler system that has at its heart the fundamental principle that only those individuals with significant dividend income will pay more tax. Investors who receive only a modest income from their shares can expect to see little or no change to the amount of tax they owe. In some circumstances, such investors may even be fortunate enough to receive a tax cut. Where can I find out more? Personal finances can be complicated, and there are numerous variations and nuances between individuals which mean that two sets of personal circumstances are rarely exactly the same. It is important therefore to understand what fundamental changes like this made at a government level mean to you personally. This way you can be sure of meeting all your obligations, and therefore avoiding penalties, while getting the best return on your investments. HMRC has published a range of documentation providing guidance on this and other subjects, which includes specific examples.