Dividend tax rates will change from 6 April 2016, this will mean increased tax rates for anybody with a limited company or a large portfolio of shares.
The current system of grossing up dividends and dividend tax credits will end. This will be replaced with a tax free allowance of £5,000 for all tax payers and the below tax bands:
- Basic rate tax payers will pay 7.5%
- Higher rate tax payers will pay 32.5%
- Additional rate tax payers will pay 38.1%
See below for the impact on basic rate tax payers (Assuming no other income):
Based on 2016/17 National Insurance Contribution thresholds the recommended Salary by us is £8,060 a year.
Example 1
Under the previous rules, with a salary of £8,060, you would have been able to take dividends of £31,446 (net amount before grossing up) without incurring any additional income tax. Under the new rules this would work out as follows:
Salary £8,060 Tax@0%
Dividends to remaining personal allowance 2,940 Tax @0%
Dividends tax free rate 5,000 Tax @ 0%
Remainder dividends 23,506 Tax @7.5% = £1,762.95
Total Income £39,506
Thus a basic rate tax payer will pay additional £1,762.95 in tax under the new rules.
Example 2
With no tax credits in the new rules, it would be advisable to take out a further £3,494 dividend (total dividend and salary = £43,000) which would result in additional tax of £262.05, therefore total income tax due of £2,025. Under the old arrangements, the tax would work out to be:
Salary £8,060 Tax@0%
Dividends £34,940 grossed up £38,822
Excess Dividend in higher rate £3,882 Tax @ 25% = £970.50
Thus a basic rate tax payer will pay additional £1,054.50 (£2,025 less £970.50) in tax under the new rules.
Contact us for further information