New tax on dividends
[/vc_column_text][/vc_column][vc_row][vc_column][vc_column_text]The Chancellor’s Summer Budget was a busy one, but not a good one if you happen to run your business through a company. From 6 April 2016 new rules mean you might have to pay extra tax on dividends you take from it. At first sight the new rules appear straightforward, but there’s more to them than meets the eye.
Current tax charges
To follow the changes you need to understand how the current system works. For 2015/16 and earlier years the taxable amount of a dividend is 10/9ths of the sum you receive. For example, if you draw a dividend from your company of £9,000, the taxable amount is £10,000. Also under current rules, if your income minus tax allowances and deductions is no more than the basic rate band (£31,785 for 2015/16), you don’t have to pay tax on dividends. But if it’s greater, tax at higher rates is payable on the excess.
From 6 April 2016 three changes apply to tax on dividends. The first is good news; thetax credit is abolished. That means the taxable amount of a £9,000 dividend is £9,000. The second change is also good news. The first £5,000 of dividends you receive will betax free. The bad news comes with the third change.
If you receive dividends in excess of £5,000 per year, the excess will be taxed at 7.5% more than the current rate. So for 2016/17 dividends received in excess of £5,000 will be taxed at:
- 7.5% where your total income less tax allowances and deductions is up to £32,000
- 32.5% to the extent your total income less tax allowances and deductions is more than £32,000 but doesn’t exceed £150,000
- 38.1% on dividends where your income less tax allowances and deductions exceeds £150,000.
Better or worse off?
Whether you’ll be better or worse off under the new rules depends on the amount of dividends you receive. If in 2016/17 you receive dividends of:
- up to £5,000 and liable at the 7.5% rate you’ll be no worse off than you were in 2015/16. If you’re a 32.5% taxpayer you’ll be better off by up to £1,250 and if you’re liable to the 38.1% rate you’ll save up to £1,528 (see The next step )
- more than £5,000 and you’re liable at the 7.5% rate you’ll be worse off by 7.5p for each further £1 of dividend you receive
- up to £21,666 and are liable at the 32.5% rate you’ll pay less tax than in 2015/16. But on dividends in excess of it you’ll be worse off by 7.5p per £1
- up to £25,250 and are liable at the 38.1% rate you’ll pay less tax than in 2015/16. But again you’ll be worse off by 7.5p per £1 for dividends in excess of that amount.
Tip. Despite the new tax rates for 2016/17 you’ll still pay less tax and NI by taking dividends rather than salary, so there’s no need to change your profit extraction strategy.
Reproduced with the permission of Indicator – FL Memo Limited. For subscription information call 01233 653500