From April 2016, the current 10% tax credit on dividends will be abolished.
A £5,000 tax free dividend allowance will be introduced.
Dividends taken above this £5000 limit will be taxed at 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate).
Dividend income will always be treated as the top end of income received during the tax year.
Individuals receiving dividends of over £5,001 will need to complete self-assessment tax returns.
Dividends from ISAs and pensions will be unaffected by this new rule.
This change will particularly affect small family companies who employ both spouses. A couple could be over £5000 worse off.
Examples of how tax on dividends will be calculated:
- Mrs Smartie, Company Director, pays herself £17,800 salary over the tax year and awards herself a dividend of £22,000 after having a busy and successful trading period.Her tax is calculated as follows:
Dividend £22,000 - £5,000 =£17,000 taxed at 7.5% basic dividend rate = £1,275
She is now paying £1,275 extra in tax as this dividend would have been covered by tax credits historically.
- Mr Cookie, Company Director, pays himself a salary of £8,000 (to ensure that he gets his NICs benefits) and after Corporation tax, votes himself a dividend of £50,000 out of retained profits. Company profit before salary and tax = £70,500, less salary of £8,000 gives profits of £62,500 thus corporation tax of £12,500.
£5,000 (dividend allowance) so 0%
£27,000 at 7.5% basic rate = £2,025
£15,000 at 32.5% higher rate = £4,875
Total tax due (corporation + dividend) = £19,400. At 2015/16 rules this would have only been £16,600
Please come in to see us or call us on 01275 873948 if you would like more information.