Guy Payne & Co

New Dividend Tax

A big change to how dividends will be taxed.

From April 2016 the notional 10% tax credit on dividends will be abolished. The ‘notional tax credit’ treated dividends as if 10% tax had already been paid. This will affect those who currently use the low salary and dividend strategy to extract profit from their limited business in a tax efficient manner.

Instead a £5,000 tax free allowance on dividends will be introduced, with dividends above this level being taxed at:

• 7.5% on dividends within the basic rate band;
• 32.5% on dividends within the higher rate band; and
• 38.1% on dividends within the additional rate band.

Dividends will continue to be taxed as the top band of income.

Example

	2015/16	2016/17
Salary (equal to PA)	10,600	11,000
Dividend up to basic band	31,785	31,785
Total income	42,385	42,785
Less personal allowance	(10,600)	(11,000)
Less dividend allowance		(5,000)
Taxable income	31,785	26,785
Taxed at 10%	3,179
Taxed at 7.5%		2,009
Less 10% notional tax deduction	(3,179)
Tax payable	NIL	2,009

Why are the changes being bought in?

Whilst there are other non-tax reasons to incorporate, it has been common for individuals to operate through a limited company to utilise the strategy of paying themselves a small salary and dividends in order to reduce their national insurance liability.

There remains tax savings, however the change is to deter small businesses from doing this by making it less advantageous.

What can you do?

• You could consider whether your spouse etc. should be a director of your company so that they can take a dividend to utilise their own £5,000 dividend allowance.
• In many cases it will be tax efficient to take a larger than normal dividend (up to your basic rate band) in the year ended 5 April 2016 before the notional 10% rule is abolished.
• You will need to complete a self-assessment tax return if you receive dividends in excess of £5,001 from 6 April 2016. Previously some business owners who took a low salary (below their personal allowance) and dividends up to their basic rate band were not required to complete a tax return.

If you would like to discuss how any of the above changes may affect you, please do not hesitate to contact us.

© Guy Payne & Co 2016