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New Dividend Tax

Apr 01, 2016

New Dividend Tax - Latest Advice from Wagner Mason

In 2015/16 a ‘husband and wife’ Limited company could extract £78k between them through a combination of salary up to the basic rate and dividends up to the higher rate and PAY NO INCOME TAX (on the cash extracted as dividends, the company would have paid corporation tax at 20%).

When the proposed changes come in 2016/17 this will no longer be the case as extracting the same £78k would result in INCOME TAX PAYABLE OF c£3.5k.

Dividend taxation works as follows from the 2016/17 tax year (from 6th April 2016):

The first £5,000 of dividends are tax free.

Dividend income over £5,000 the dividend income is taxed as follows:

  1. If you have any remaining unused personal allowance (£11,000 for 2016-17) then that element is tax free
  2. Dividends above the basic tax band are charged at 32.5% (this was previously 25% once the dividend tax credit had been take n account of)

    Additional rates of tax will apply at the upper tax band (£150,000 for 2016-17)

    The dividend tax credit has been scrapped, which removes the need to gross up the net dividend received for working out how much tax allowance it has used. This has made things simpler and also means that you can now extract more within the basic rate threshold.

    Corporation Tax rates are coming down (19% in 2017 and 17% by 2020) but this only partially mitigates this increase.

    This makes it ever more important that all tax allowances are maximised and the shareholding of the company is reviewed (for example, prior to the £5k dividend allowance there would have been no benefit of a higher rate tax payer husband or wife having shares).