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The new dividend tax was introduced in the Financial Year commencing 6 April 2016. This is a tax on the dividends owner directors take from their limited companies to ensure that they are remunerated in the most tax efficient way. Previously this method of profit extraction has been extremely beneficial over the taxation treatment for Sole Traders and Partnerships, however, this has now stopped. Although there are still opportunities to pay less tax through a Limited Company than through other business models, this scope has been dramatically reduced by the introduction of the Dividend Tax.
In a nutshell, it has been the norm to take a small Directors salary and then take dividends up to the higher rate tax limit, this has ensured that unless you take extra dividends over and above the higher rate limit then effectively you have not paid any personal tax on your remuneration.
From 6 April 2016 this was no longer the case. You can still take the Directors minimum salary to ensure that you receive your National Insurance contribution for the year, however you will only be able to receive the first £5,000 of your dividend tax free, anything above this will be taxed at 7.5% up to the higher rate, 32.5% at the higher rate and 38.1% at the additional rate. The above figure are correct for the 16-17 financial year, for the current financial year (year ended 5 April 2018) the amount of dividend that can be taken tax free has reduced to £3,000 per person.
Assuming that someone takes the full amount of cash dividend without exposing themselves to higher rate tax then the tax situation will look like below:
16-17 Financial year
Total income £43,000
Tax free allowance £11,000
Tax free dividend allowance £5,000
Dividend taxable at 7.5% = £27,000
Tax payable = £2,025
This is tax that has not been paid before and therefore it is possible HMRC will want it in advance and may adjust your tax code based on the amount of dividend taken in the previous year.
The above calculations will be affected by many variables, including but not exclusively:
More information can be obtained by signing up for one of our value for money Fixed Fee Accounting Packages or by calling us for an informal chat on 01666 829013