Due to two changes to HM Revenue & Customs’ (HMRC) Self Assessment criteria, many individuals now need to complete tax returns if they receive dividends or Child Benefit.
Due to the abolition of the 10% tax credit on dividends and the introduction of the dividends allowance by HMRC from 5 April 2016, many basic rate taxpayers are now required to register for Self Assessment and to complete a tax return for the first time.
If the amount of dividends received by an individual in the tax year exceeds the dividend allowance of £5,000 (for 2016/17), tax is payable on these dividends. Dividends are taxed as the top slice of income, after earnings and savings income. Tax rates depend on income, and will be 7.5% basic rate, 32.5% higher rate and 38.1% additional rate.
If you receive Child Benefit, you may now need to complete a tax return Dividends and Child Benefit – tax return implications due to the High Income Child Benefit Charge introduced by HMRC.
If you or your partner earn between £50,000 and £60,000 per year, the partner with the higher earnings is required to complete a tax return. At this income level Child Benefit is restricted and a proportion is repayable as Income Tax on the Self Assessment tax return.
If you or your partner earn above £60,000 per year, again a tax return will be required by the partner with the higher earnings. However, all of the Child Benefit will now be repayable as Income Tax.
These thresholds are after deducting pension contributions: as well as the Income Tax benefits mentioned above, making pension contributions could help you to retain your Child Benefit.
Do dividends count as income for child benefit?
Yes. The Child Benefit Charge is calculated based upon your total net income. Your net income includes all sources of income that are subject to income tax; such as employment (including self employment), pensions, property income, savings and dividends. Any income from tax-free investments is not included.
If you would like more information, or believe you may fall into either of these categories and would like to check, please contact us today.