The Tax Rules for Dividends Are Changing

Monday October 19, 2015

If your business is paying you dividends, then things are about to change for you. We'll guide you through the new rules to make sure you're up to date.

For a lot of brave RIFT Warriors, taking part of their salaries as share dividends has helped to plot the safest course through the Small Business Battlefield. Coming into force from the 6th of April 2016, the 2015 Summer Budget announced changes to the way those dividends are taxed. They're pretty significant, and you need to start updating your maps now in preparation.

As your Business Bodyguards, it's our sworn duty to make you aware of all threats and opportunities to your business. If you have any questions at all about what these changes mean then call us right away on 01233 653006. We're here to protect you!

Here's a basic rundown:

Tax Rates on Dividends at Present

  • Dividends currently include a 10% tax credit. 
  • Only higher rate tax payers pay tax on dividends.
  • If you pay income tax at 40% your net dividends are effectively taxed at 25%.
  • If you pay income tax at 45% your net dividends are effectively taxed at 30.55%.

Changes to Tax Rates on Dividends from April 2016 

  • In every case, the first £5,000 of dividend income will be tax-free.
  • Basic rate tax payers will pay 7.5% tax on dividends.
  • If you pay Income Tax at 40% your dividends are taxed at 32.5%
  • If you pay Income Tax at 45% your dividends are taxed at 38.1%.

These changes will mean that higher or top-rate taxpayers with a dividend income of around £22,000 or less will actually gain from the change. However, virtually everyone else with dividend income from a Limited Company will find themselves worse off.

Example Calculation

Right now, if your income consists of a salary of £7,500 and £35,000 of dividends can expect to pay tax of about £1,100. From the 6th of April, the changes mean you'll be paying tax of around £2,250.

Will It Still  Be Worth Taking Dividends Rather than Salary?

Your first thought may be to wonder whether it will still be worth taking money out as dividends once the changes kick in. The simple answer is yes, it will.

This is because you shouldn't just be looking at the dividend tax rate in isolation. It's not quite that simple. For example, substituting a salary or bonus for the dividend would mean that income suddenly becomes subject to National Insurance.  We can talk to you about what this will mean for your personal circumstances and take you through the different options.

What Should I Do About It?

As always, there are a number of options - and what's best for you will depend on your personal circumstances. For example, there may be other ways to extract value from your business by changing your operating structures or processes. You may also have options relating to:

  • The date on which you vote on dividends for your company, which may provide an overall saving for next year in certain circumstances.
  • How you pay for your business premises.
  • How Directors loan accounts are being used.
  • Selling assets to the company. However, this may lead to other taxes to consider, such as Stamp Duty Land Tax or personal Capital Gains Tax.

As always, RIFT is here to scout the route ahead and escort you to safe ground. Give us a call to talk through your best options before the bombshell drops - and stay tuned to this frequency for more Voices From the RIFT...

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