New Dividend Tax 2016
The New Dividend Tax
Effective from April 6 2016
A new tax is planned to be introduced in the new 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. Until now this method of profit extraction has been extremely beneficial over the taxation treatment for Sole Traders and Partnerships, however, this is now going to stop. 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 will no longer be 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.
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:
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:
- Share split with partners
- Other income
- Level of dividend required
- Budget on Wednesday
- Level of salary taken
- Availability of profit to declare a dividend
We will be discussing the above with our accounting clients before the end of March and also offering advice as to the preferred and optimal levels of dividend to be taken before April 5 2016. This is an important point as it may be beneficial to take extra dividend this year before the new tax becomes effective.
We have developed a basic Dividend Tax Calculator that will allow you to see the impact of different levels of salary and dividend for the year and the level of tax that you will need to pay. If you would like a copy to be mailed over please send an email to us at email@example.com titled Dividend Calculator and we will send you a copy for your personal use.
The above is quire complex, however it is likely to have a substantial impact on your personal finances so I feel it is worth including the examples below that have been taken straight off the HMRC website and shows examples using differing scenarios.
The way the allowance will work in different situations is demonstrated in the examples below.
Where appropriate to the calculations, the examples use the limits that will apply from April 2016:
- Personal Allowance: £11,000
- Basic Rate Limit: £32,000
- Higher Rate Threshold: £43,000
“I receive less than £5,000 per year in dividends”
From April 2016 you won’t have to pay tax on your dividend income as it is within your new Dividend Allowance.
“I receive dividends of £600 from shares invested in an ISA”
As is the case now, no tax is due on dividend income within an ISA, whatever rate of tax you pay.
“I have a non-dividend income of £6,500, and a dividend income of £12,000 from shares outside of an ISA”
With a Personal Allowance of £11,000, £4,500 of the dividends are under the threshold for tax. A further £5,000 comes within the Dividend Allowance, leaving tax to pay at Basic Rate (7.5%) on £2,500.
“I have a non-dividend income of £20,000, and receive dividends of £6,000 outside of an ISA”
You won’t need to pay tax on the first £5,000 of dividends due to the Dividend Allowance, but will pay tax on £1,000 of dividends at 7.5%.
“I have a non-dividend income of £18,000, and receive dividends of £22,000 outside of an ISA”
Of the £18,000 non-dividend income:
- £11,000 is covered by the Personal Allowance
- the remaining £7,000 to be taxed at Basic Rate
Of the £22,000 dividend income:
- the Dividend Allowance covers the first £5,000
- the remaining £17,000 of dividends to be taxed at the Basic Rate (7.5%)
“I have a non-dividend income of £40,000, and receive dividends of £9,000 outside of an ISA”
Of the £40,000 non-dividend income, £11,000 is covered by the Personal Allowance, leaving £29,000 to be taxed at basic rate.
This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. The Dividend Allowance covers this £3,000 first, leaving £2,000 of Allowance to use in the higher rate band. All of this £5,000 dividend income is therefore covered by the Allowance and is not subject to tax.
The remaining £4,000 of dividends are all taxed at higher rate (32.5%).