New rule on Tax on Share Dividends by Alex Chrysostomou
14th March 2016
14th March 2016
As featured in our March 2016 issue of Palmers Green & Southgate LIFE magazine
Alex loves business and gives regular presentations to those wanting to learn about the accountancy and tax part of running their own business. He helps break down the barriers that people face in running their own business and how to maximise their earnings. The biggest enjoyment that Alex gets from his role as an accountant is to work with people from all walks of life and most importantly helping them with their money.
I run my own company and pay myself with a salary and dividend. I always thought that this was the best way of doing it to help lower my tax bill. However, I understand that there are new rules on tax on dividends. How will this impact me?
One of the reasons that owner managed businesses follow the limited company format, is the tax advantages found by extracting your earnings in the salary/dividend format. This has provided huge tax savings for many years. However, from April 2016, the tax rules on dividends will change and have a material impact on the amount of tax you will pay.
Many of our clients pay themselves the personal allowance (£10,600 for the current 2015-16 tax year) and then pay dividends up to the basic rate bank (approximately an additional £28,500). This currently attracts no income tax (although dividends are extracted from profits, which are already taxed at 20%).
If you are to follow this structure for the 2016-17 tax year, i.e. pay yourself the personal allowance (£11,000 for 2016-17) and then an additional £28,500 dividends – you will face income tax of £1,575.00. From 2016-17, the first £5,000 dividend income in each tax year will be tax-free. Sums above that will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate tax payers.
It appears that we are worse off under the new regime, however, whilst this may be true for many taxpayers, there are others, such as higher-rate taxpayers with £5,000 or less in dividend income, who will gain – currently they pay 25% on the whole sum (or £1,250), while under the new regime there will be no tax to pay, thanks to the £5,000 allowance.
The change in rules will require us to be more creative when trying to extract earnings out of your company in the most tax efficient way. Making full use of other allowances, things like childcare vouchers/interest income/transferring marriage allowance etc. will need to be utilised to help keep your tax bill down.
If you have an accounting question for Alex please e-mail him directly he will be happy to assist you, alternatively Alexander Associates offer an initial free consultation please contact them to find out more.
Disclaimer: The information provided in this article should not be construed as legal advice and the information is offered for information purposes only. You should always seek advice from an appropriately qualified accountant on any specific accountancy enquiry.
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