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Employee Services Update - December 2015

01 December 2015

Update on Company dividends and tax advantaged Share Incentive Plans (SIP)

The new dividend tax regime - major change or business as usual?

In July, the Chancellor announced important changes to the tax regime and the way company dividends are to be taxed in the UK. From April 2016, there will be an additional income tax charge on dividends at the rate of 7.5% for basic rate tax payers, 32.5% for higher rate tax payers and 38.1% for additional rate tax payers.

The long-standing system of tax credits attached to dividends will go and in its place there will be a new tax-free Dividend Allowance. This will mean that there will be no tax to pay on the first £5,000 of dividend income, no matter what non-dividend income a shareholder may have. Dividends paid on shares held within pensions and ISAs will be unaffected and remain tax free.

As a shareholder receiving dividends, how will a participant in the SIP be affected? 

In August, HMRC issued a Dividend Allowance factsheet. Many SIP participants fall into the category of ‘investor with modest income from shares’ and so will see either a tax cut or no change in the amount of tax they owe on cash dividends they receive.

However, what is not so clear is the impact on the current tax advantages related to SIP Dividend Shares, set out in both the Income Tax (Earnings and Pensions) Act 2003 and the Income Tax (Trading and Other Income) Act 2005. A SIP requires cash dividends to be paid over to participants as soon as practicable, but may provide that they can be used to buy further plan shares. The process is known as ‘reinvestment’ and the bought shares are called ‘Dividend Shares’.

There is no income tax due if a participant holds Dividend Shares for three years or more or takes them out of the plan due to a ‘good leaver’ reason (i.e. leaving due to injury or disability, redundancy, TUPE transfer, change of control of the company, retirement or death). The key question is whether or not these exemptions to income tax will remain and whether or not reinvested dividend income will count towards the £5,000 Dividend Allowance. We have to wait until publication of draft legislation on 9 December 2015 to find out the details.

Providing reinvestment within a SIP enables participants to grow their shareholding in a tax efficient way and according to the most recent ifs ProShare SIP survey, 49% of SIPs offer dividend reinvestment, with an average participant take-up of 37.5% (where there is a choice, rather than being compulsory). What is clear is that whatever is changed, there will be an impact on both SIP administration and information provided to participants.

We assume that instead of providing participants with a tax voucher there will some other type of Dividend Payment Advice or Statement. The processes around issuing these to SIP ‘bad’ leavers, when Dividend Shares have not been held for the required three years will need to be looked at. Brochures, statements and questions and answers will all need updating. Thought also needs to go into how the Dividend Allowance will impact those SIPs where there is a non-UK listed issuer.

So, major change or business as usual?

Phil Ainsley, Managing Director, Employee Services, comments, "I think that we’ll have to wait for draft legislation to be published in December and our subsequent impact assessment, before answering that question". Phil continues, "In the meantime, we’re working closely with our share registration colleagues who are looking more broadly at the impact on all shareholders." Look out for our next Employee Service Update, where we should have an answer.

 For more on this topic please contact your Service Delivery Manager.