Only the first £5,000 of company dividends are now free of tax, in a change which became effective from 6 April 2016 (reducing to £2,000 from 6 April 2018).
Adopted in the summer 2015 Budget, we’ve all known about the change for a while but how many are prepared and how many know how this will impact on company directors?
Previously, company dividends within the basic tax allowance were effectively taxed at 0% (10% less a tax credit to bring it back to zero). As we noted in our March 2016 blog, 10 things to consider before the end of the Tax Year:
From 6 April 2016, most individuals that receive more than £5,000 of taxable dividend income will pay more tax on this dividend income.
Tax on dividends has increased:
- in the basic rate band from 0% to 7.5%
- in the higher rate band from 25% to 32.5%
- in the additional rate band from 30.56% to 38.1%
When will this affect me?
This change has been affecting you since April 2016 – ensure you get ahead by setting aside additional monies ready for payment in your 2016/17 self-assessment tax return by 31 January 2018.
How much extra will it cost me?
It’s affecting all those in receipt of company dividends over £5,000. We’ve included a couple of examples below to show how much extra you need to set aside as a company director:
£30,000 company dividend 2016/17
Dividend taxed at:
|
Percentage tax |
Tax amount to pay |
| First £5,000
|
0% |
– |
| Next £25,000 |
Basic rate tax 7.5% |
£1,875 |
| Total |
|
£1,875 |
|
|
|
| Increase from previous tax regime |
|
£1,875 |
£60,000 company dividend 2016/17
|
Percentage tax |
Tax amount to pay |
| First £5,000
|
0% |
– |
| Next £27,000 |
Basic rate tax 7.5% |
£1,875 |
| Next £28,000 |
Higher rate tax 32.5% |
£9,100 |
| Total |
|
£10,975 |
|
|
|
| Increase from previous tax regime |
|
£3,975 |
How do I pay it?
You can pay the additional tax along with your self-assessment tax return by 31 January 2018 or you can opt to pay it as you go by making payments throughout the year to HMRC. Check with your accountant which HMRC bank account to make the payments into and which reference number to quote.
What other changes are under way?
In a surprise move, announced in the Spring Budget 2017, the Chancellor said that the dividend tax is being cut from £5,000 to £2,000, effective from April 2018. This makes it even more imperative to start planning how these changes will affect you.
Is there a way I can minimise my dividend tax payments?
When news of the new dividend tax was first mooted there was hope that pressure from businesses would force the government into backing down (see our blog here) but it’s set to stay so the question now is how you can make the best of the situation by looking at your position as a whole, there are changes to National Insurance Contributions and Corporation Tax also coming into effect, for example.
Make an appointment with us at Sestini & Co and we’ll review your outgoings and incomings and advise the most tax efficient way to proceed. The sooner you meet with us, the sooner our recommendations can start to have an effect on your financial position.
Contact us:
If you’d like to discuss any aspects of this with us, call us on 01761 241 861 or email us today. We will be pleased to advise you or to invite you into our offices in Paulton, near Bristol and Bath, for a consultation.
