Having spoken to various people over the last few weeks, it has come to our attention that shareholders of Limited Companies don’t necessarily know the impact that the new Dividend Tax which will be introduced in April 2016 will have on their personal tax affairs.
These changes will hit those small companies who pay a small salary and large dividend payment in order to reduce national insurance costs. From the changes that are forthcoming, it appears that the current government would much prefer workers to be self employed rather than a small company.
This potential change will hit those who work with spouses in family companies particularly hard, a couple could be over £5,000 per year worse off.
HMRC have released some examples of how the dividend tax will work,
and I will run through some of these below.
Where appropriate to the calculations, the examples use the limits that will apply from April 2016:
· Personal Allowance: £11,000
· Basic Rate Limit: £32,000
· Higher Rate Threshold: £43,000
“I receive less than £5,000 per year in dividends”
You will no longer have to pay tax on your dividend income, regardless of the level of any other earnings.
“I receive dividends of £600 from shares invested in an ISA”
There is no change to income from an ISA, and no tax will be due on this income.
“I have a non-dividend income of £6,500, and a dividend income of £12,000 from shares outside of an ISA”
Previously you would not have been taxed on the dividends, so you pay an extra £187.50 in tax.
“I have a non-dividend income of £20,000, and receive dividends of £6,000 outside of an ISA”
Again, previously there would have been no tax on the dividends, so you pay an extra £75 in tax.
“I have a non-dividend income of £18,000, and receive dividends of £22,000 outside of an ISA”
Previously there would have been no tax on the dividend income, so there is an extra £1,275 in tax.
For some owner managed business, the directors will take a minimum salary (£8,000) and maximum dividend (£35,000) up to the higher rate threshold. We can see how that plays out below…
As there would not previously have been any personal tax due on the Dividend Income, there is now an additional £2,025 tax liability due on this amount. Further Dividends over the higher threshold will also increase your personal tax bill, as these are taxed at 25%!
As you can see, there are big changes coming, and to ensure you stay as tax efficient as possible requires planning. Please get in touch if you want to discuss how the dividend tax will affect you from April 2016.