How will the proposed dividend tax affect you?
From April 2016 the way dividends are taxed is going to change.
How dividends are taxed now?
The amount you take as dividends from the company (net dividends) is multiplied by 10/9 to produce the gross dividend. This is to take into account a notional ‘tax credit’ as Corporation Tax has already been paid by the company.
The gross dividend is then taxed at these rates:
- 10% for basic rate tax band (after the tax credit is taken into account there is no further tax to pay)
- 5% for higher rate tax band (after the tax credit is taken into account dividends falling into higher rate band are taxed at 25%)
- 5% for additional rate tax band (after the tax credit is taken into account dividends falling into additional rate band are taxed at 30.56%)
So, for example, in the 2015/16 tax year you could earn £31,785 (gross dividends) – in addition to your £10,600 personal allowance – and pay no income tax at all.
How will dividends be taxed from April 2016?
The 10% tax credit will be abolished and the amount you take from the company will be the gross dividend. After the personal allowance has been taken into account (which, if entitled, will be £11,000 from April 2016) you will be able to receive £5,000 dividends and have no tax liability. This means if your entire income is £16,000 or less you will pay no tax on dividends at all.
For any dividends taken in excess of £5,000 the new dividend tax bands will be:
- 5% basic rate tax band
- 5% higher rate tax band
- 1% additional rate tax band
Here is an example of the impact of this:
If you take £8,060 as salary and anything else as dividends
- £8,060 salary is included in your personal allowance
- First £2,940 of dividends are included in your personal allowance
- Next £5,000 of dividends are included in your dividend allowance
- Next £27,000 of dividends are taxed at 7.5% = £2,025
- Any other dividends taken that fall into higher rate tax band will be taxed at 32.5%
- Any other dividends taken that fall into additional rate tax band will be taxed at 38.1%
This can be applied to any situation where you take a salary up to £11,000 (although if your salary is above £8,060 it will be subject to National Insurance Contributions).
If you would like any further information please contact me on 01229 813388 or email firstname.lastname@example.org
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