While many of us were taking a much needed break this summer, the Chancellor was busy announcing a series of changes as part of his latest budget. Many of these changes will come into effect as of April 2016; one that will affect many individuals and companies is the change to dividend tax.
What are dividends?
Put simply, a dividend is a sum of money paid regularly to the shareholders of a company from its profits. That might mean you get a dividend from a company you own or work for, from somewhere you have money invested, or even from a pension fund. For many companies, paying dividends has been a more tax efficient way to pay directors than through the salary route. Indeed, it’s traditionally been one of the main benefits of being an incorporated company.
What are the current rules?
Admittedly the current system is quite complicated. At the moment, your net dividend (or the amount actually paid into your bank account) is multiplied by 10 and divided by 9 to give you a gross dividend. This calculation is done to create a ‘tax credit’ because your company will already have paid Corporation Tax. Once you have your gross dividend figure, your tax is then worked out at the following rates:
|Tax Band||Effective Dividend Tax Rate|
|Basic rate (and non-taxpayers)||10%|
So as an example, in the current tax year (2015/16) you could earn £31,785 (gross dividends), in addition to the £10,600 personal allowance – a total of £42,385, and pay no income tax at all.
What will happen in April 2016?
We’ve taken a close look at the changes and this is what you can expect to see from next spring:
- From 6th April 2016, the dividend tax credit will be abolished and replaced by a new tax-free dividend allowance.
- After the personal allowance has been taken into account (£11,000 from April 2016), everyone will be able to receive £5,000 of dividend income without having to pay any tax at all.
- Dividends above this amount will be taxed at the following rates:
|Tax Band||Effective Dividend Tax Rate|
|Basic rate (and non-taxpayers)||7.5% on anything over £5,000|
If you want to find out more, HM Revenue & Customs have provided a useful dividend factsheet, which gives a few examples so you can see how the changes might affect you.
What impact will the changes have?
The Government has stated that the changes are being introduced to make the system simpler as well as clamping down on tax avoidance. No doubt George Osborne has also spotted a way to recoup a bit of extra money for the treasury. It’s estimated that the new dividend tax regime could raise £2.54bn during 2016/17.
Many feel that the changes are anti small business and will be a disincentive to people thinking about taking a risk and starting up their own business. It may also convince many to carry on as a sole trader, rather than taking the step to becoming a limited company.
One area that it definitely has a larger impact is for those who work with a spouse in a family company. Just as one example, a business owner who pays themselves £30,000 of their company’s profits will pay an additional £1,653 in tax each year. This will be doubled if the business is run by a husband and wife team which many small companies are.
The changes will not however affect dividends from shares held in ISA’s or those received from pension funds exempt from tax which is good news.
Make sure you’re prepared
The essential thing to do at this stage is to find out how the changes will affect you and your business and how to best plan for them.
There’s plenty of information online but the best way to feel reassured is to speak to your accountant who can review your specific circumstances and help you take appropriate action. The sooner you start this process the better as there may well be things you can do before the end of this tax year that will help with the transition.
In the meantime below is a brief overview of the changes and some questions you need to start thinking about:
- The new rules will affect anyone who has any dividend income.
- Taxpayers will have to pay any tax due through self-assessment.
- Your dividend income will not reduce your total income for tax purposes but it will mean you won’t have to pay tax on the first £5,000 of dividend income.
- Think about your options – it may be better to take a salary and pay tax through PAYE than to take dividends.
- Make the most of each spouse’s income tax allowance and tax bands and ensure that taxable dividends are paid in the name of the spouse who pays the lowest tax rate.
- And don’t forget about using your ISA allowance. By investing money in an ISA, you’ll be able to withdraw unlimited dividends tax-free and will not be subject to capital gains tax.
Need some help?
Our team are already working through these changes with many of our clients and helping them to put in place plans to reduce the impact it will have on their business. If you have any queries about how this will affect you or your business, just give us a call and we’ll give you all the information you need. Call our team on 0117 379 0810.
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Categorised in: Industry News
This post was written by Steph Roffey