Dividend taxation will change from April 2016. The old system which recognised that Companies paid tax on their profits before paying dividends to their shareholders is ending to enable the government to double tax dividends. As we know, a company cannot pay a dividend unless it already has paid tax on its distributable reserves. Unfair? Yes. Is there anything that can be done? Yes but only by you.

Presently UK dividends are paid with a notional 10% tax credit as the intent was to remove double taxation. This is why non and basic rate taxpayers had no further tax liability on dividends received. But it now appears the government has decided to impose double taxation on dividends by removing the tax credit and imposing a new tax on shareholders.

As of April 2016, it’s expected that all taxpayers will have a £5,000 a year tax-free dividend allowance. Dividends exceeding this amount will be taxable, with basic rate taxpayers facing a 7.5% tax, higher rate taxpayers facing 32.5% and additional rate tax payers dealing with a 38.1% rate.

So if you’re a contractor or investor, is there anything that can you do to mitigate this taxation?

The point to make is that if it’s subject to income tax then there are measures available to help defer, or mitigate, taxation. Whilst the anticipated 2016 Dividend tax rates are lower than for other forms of Revenue (Salaries, Pension income, etc.), for contractors using a company structure to pay themselves following taxation at the company level the new dividend taxation can easily reduce their after-tax income materially if no steps are taken.

So what can be done? Judicious use of existing tax mitigated structures can help: these range from use of NISA structures if it’s a considerable amount of directly held shares, to Pension contributions, as well as structures such as investment into Enterprise Investment Schemes (EIS), Small Enterprise Investment Schemes (SEIS), and Venture Capital Trusts (VCT).

As you know, there is no taxation for assets held within an ISA, although the holding would need to be sizeable to exceed the £5,000 a year tax-free dividend allowance.

Pension contributions make use of pension relief using the tax relief on your contribution to increase your tax bands by the amount of the contribution, and this also allows you to defer taxation until retirement.

Alternatives such as EIS, SEIS and VCT investment provide immediate offset against income tax payable, with VCTs also having the additional benefit of paying tax-free dividends for income. It is important, however, to recognise that such investment types embody higher risk.

Clearly there are a number of steps that can be taken to better manage dividend exposure, and we believe it is important to review these with an advisor prior to taking action.