As you may be aware, dividend taxation rates are changing from 6th April 2016. In order to help with your tax planning, we have set out below how these changes may affect you.
What are the current rules?
Currently, if you are a basic rate tax payer you do not pay any personal tax on dividends; up to £42,385 gross income in the 2015/16 tax year. Above this, you would expect to pay 25% personal tax on any dividends withdrawn.
What are the new rules?
From 6th April 2016, everyone will receive a tax-free, £5,000 dividend allowance against any dividend paid per year.
After this allowance, personal tax on dividends will increase by 7.5%.
What are the implications?
Assuming you withdraw our recommended salary of £8,000 per year, the new dividend tax changes from 6th April 2016 will impact you as follow:
|Tax free dividends||Up to £8,000 (includes unused personal allowance)|
|Basic rate @ 7.5%||Next £27,000|
|Higher rate @ 32.5%||Next £107,000|
|Additional rate @ 38.1%||All additional dividends|
However, in some cases, for some of you, you may be able to withdraw more dividends now (before 5th April) and pay less tax overall (although you will pay tax earlier).
However, this is purely based upon personal circumstances, what you have taken already in dividends, an expectation your income will remain at a constant level next year and have sufficient company profits. It’s certainly not a simple calculation!
However, if you haven’t been taking out all your available dividends from the company and you expect your income to carry on throughout next year, it might be a good idea to speak to your accountant before the 5th April.