It has been common practice for company directors to pay themselves a modest salary and then supplement this salary with dividend payments which were subject to tax at a lower rate. For many Ltd company directors this was a tax efficient approach which gave them the flexibility to earn more through dividend payments when the business was enjoying a period of profitability. Then HMRC announced they were making changes to tax on dividends.
According to HMRC the changes will simplify tax and replace a system which was over complicated. This may be the case but with the new legislation it is also expected to raise more money for the treasury and undoubtedly means many small business owners will be paying more tax than in previous years.
What has changed?
The notional 10% tax credit on dividends has been abolished.
A dividend allowance of £5000 per tax year has been introduced. This means that you can receive up to £5000in dividend payments completely tax free.
Dividends received above the £5000 rate will be taxed as follows:
• 7.5% basic rate tax payers
• 32.5% higher rate tax payers
• and 38.1% additional rate tax payers
• basic rate tax payers who receive dividends of more than £5001 will need to complete a self-assessment tax return
Dividend payments from ISAs (Individual Savings Accounts) are unaffected by the changes and no tax is due on these. However dividends from shares held outside of ISAs will need to be taken into account.
The new system applies to dividends declared on or after the 6th April 2016. The change is expected to raise £2.54 billion for the treasury in 2016/2017. The government has claimed that most people will be better off under the new system but many contractors and small business owners argue that this isn’t the case.
If you are a director of your own limited company and think the changes will have an impact on your financial situation then now is the time to consider how you draw your income. If you are unsure or have questions about your options then we’d be happy to talk through your specific circumstances and work with you to find the best approach for you.