As part of the sweeping reforms to British taxes, announced in the Autumn Statement last year, the dividend allowance – the value UK taxpayers can receive in dividend payments without a tax liability arising – dropped significantly from £2,000 to £1,000.
With further changes due to take effect from the start of the 2024/25 tax year, the ramifications are significant for shareholders and investors in UK-based companies, commonly receiving returns split between salaries, capital appreciation and dividend disbursements.
The most viable course of action relies on an analysis of your tax exposure and the quantifiable difference the reduced dividend allowance will make to your annual tax obligations, both at home and overseas. It will also depend on your residency, tax residency status and the average dividend income you receive.
Chase Buchanan Wealth Management explains why dividend allowances may influence tax efficiency strategies to help expats and foreign national company owners manage the changes and prepare for future adjustments, which will see tax-free dividend thresholds halve once more.
Recap on the Changes to UK Dividend Allowances From 2023
UK taxpayers will pay the same taxation rates against dividend income, but the tax-free allowance they can earn before incurring a tax obligation has fallen by 50%. The previous allowance of £5,000 was reduced to £2,000 from the start of the 2018 tax year and has subsequently been minimised further:
- From April 2023, the dividend allowance fell from £2,000 to £1,000.
- In April 2024, that allowance will drop again, also by half, to £500.
Shareholders and expats, with UK taxpayer status, must examine their broader tax position to understand how their overall tax obligations may have changed.
For example, the personal allowance, which is treated separately from the dividend allowance, has been frozen at £12,570 until the start of the 2028/29 tax year. Tax band thresholds have also been frozen, and capital gains tax allowances have dropped from £12,300 to £6,000, with an expected additional reduction to £3,000 from the start of the next tax year.
Furthermore, there is speculation that the minimal £500 dividend allowance due to be implemented from April 2024 is part of a pathway to remove the allowance altogether from the tax regime. For the time being, dividend tax rates are static, 8.75% if you are a basic rate tax payer, lifting to 33.75% for higher rate tax payers and 39.35% for additional rate tax payers.
Tax Treatments of Dividend Income By Country
Expats with UK company shares, within their portfolios, need to deploy different strategies to deal with the changes to British dividend allowances, with much dependent on their residency, tax residency status overseas and the projected income generated through dividend disbursements.
Tax residency is key because if an expat lives in another country for the majority of the year and/or has other links to their country of residence, they will normally be categorised as a tax resident. The outcome is that they will usually be taxed on their worldwide income – including dividends from overseas.
In terms of tax liabilities, the reduced UK dividend allowance may not have any effect, but the tax rules in the country will dictate the tax you pay.
It is also important to clarify that tax residency and visa-based residency are two different assessments. Expats can live in a country with a valid residence permit but remain liable for taxes in the UK depending on the time they spend in each country, their source of income, and other factors.
This topic can become complex, with rules around ‘disregarded income’ where a UK citizen who is now non-resident qualifies as an overseas tax resident through the Statutory Residence Test but has a split year, with one portion spent as a UK taxpayer and the remainder as an overseas tax resident. We advise any expat to seek professional advice to ensure they understand how the rules apply and declare and pay the correct taxes.
Paying Taxes on UK Dividend Income Overseas
Part of any international relocation is assessing the tax system in the country you choose to move to and determining how foreign-sourced dividend income is treated.
Some countries have favourable tax treatments. Cyprus, for example, taxes interest and dividend income separately from personal income tax as defence contributions. Expat residents who are otherwise taxable in Cyprus do not have to pay defence contributions for the first 17 years of residency – in effect, dividend income is outside the scope of taxation for this period.
Portugal applies a flat rate 28% tax on dividends and interest. However, tax residents can choose to pay tax on their income based on the marginal income tax rates, which start at 14.5% for income up to €7,479. The highest tax bracket is 48% on income above €78,834 for the 2023 tax period.
Other tax regimes include dividend income in standard income tax calculations, tax foreign-sourced income on flat rates, or apply withholding taxes. They may also reduce withholding taxes applied to interest and dividends or vary tax obligations depending on the company’s location and whether the dividend income has already been subject to overseas business taxes.
Shareholders with UK dividend income may also need to consider their exposure to capital gains tax if they sell, transfer, or dispose of their shares while living abroad as an overseas tax resident. The general rule is that gains made on UK company shares are not taxable in Britain unless you relocate back to the UK within five years.
Incorporating Owned Businesses Overseas
A final consideration may apply where expats own a business and have the option of deciding to incorporate the company in their new destination. Locations including Malta and Portugal have attractive tax treatments, benefiting businesses and investors looking to change the incorporation status of their business and transition a company they own to a new location.
This option is, of course, only relevant to shareholders who own a business and wish to restructure their commercial interests in light of both corporation tax and dividend taxation – but it is worth having a full picture of what changes to the dividend allowance may mean for you, and the varied options available to mitigate any exposure to increased taxation.
*Information correct as at July 2023