Latest Article: Dividend taxation 2016_17 onwards
Posted by: david on Nov 28, 2015
Here’s an explanation of how dividends are to be taxed from 6 April 2016 with examples.
Also, we’ve included an idea that may help to reduce the tax a little.
- From April 2016, a £5,000 tax free dividend allowance will be introduced
- Dividends above this allowance will be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate)
- Dividends received by pensions and ISAs will be unaffected
- The notional 10% tax credit will be abolished
Why are the government doing this?
The government seem to consider that small business owners who pay themselves a low salary and dividends are enjoying an unfair tax advantage by reducing their national insurance costs. It could have quite a dramatic impact on a husband and wife company where the couple could be over £4,000 worse off.
So how does this work?
Taking the following into account
- Income tax personal allowance £11,000
- Basic rate threshold £32,000
- Higher rate threshold £43,000
Let’s assume you have dividend income (outside of an ISA) of £5,000 then you will pay no tax on your dividends. This applies even if you are a higher rate taxpayer. This is because your dividends are covered by the new £5,000 allowance! If your total income (including dividends) is less than £11,000 then this is covered by your personal allowance and your dividend allowance of £5,000 is therefore unused.
Some further examples
Salary £13,000 and dividends £15,000. In tax year 2015_16 you would pay total personal tax of £480. Next year it will be £1,150.
- Salary £13,000 and dividends £26,447 (on the high rate tax threshold). In tax year 2015_16 you would pay total personal tax of £480. Next year it will be £2,275 assuming you kept to the new £43,000 high rate tax threshold.
- Salary £13,000 and dividends £50,000. In tax year 2015_16 you would pay total personal tax of £6,368. Next year it will be £8,775
So is there anything I can do about this?
VCT and EIS spring to mind. See our blog - http://www.rodliffeaccounting.com/news/131/99/Enterprise-investment-scheme-EIS-venture-capital-trusts-VCT.htm
You could accelerate your dividends.
Eddy takes dividends of £60,000 each year with no other income. His tax liability for 2015/16 will be £5,463 and if he receives the same dividend income in 2016/17 it will be £7,550. This is a total tax bill of £13,013 for the two years.
Instead, Eddy’s company pays him £20,000 of dividends in 2015/16 rather than in 2016/17, which increases his tax to £10,463 for 2015/16 and reduces his 2016/17 tax liability to £1,800. This means Eddy pays £12,263 for the two tax years combined, saving £750 tax in total.
Where acceleration of dividends is possible it would be wise to check the calculations first as there are many other things to consider. For example:-
- The law requires that there needs to be sufficient profit available in order to pay an accelerated dividend
- Will the extra dividend push your total income in 2015/16 into a higher tax band resulting in a higher rate or additional rate tax liability? If so, much or all of the benefit could be lost.
- Could the extra dividend mean the clawback of child benefit in 2015/16?
- Paying an accelerated dividend will bring forward the payment of tax by one year. This cash flow disadvantage needs to be balanced by the tax saving gained over the 2 years
- Could the funds potentially available to pay as an accelerated dividend be required by the business in 2016/17 so bringing them forward wouldn’t be wise?
Let us know if you would like more details.
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