It’s all change on dividend tax rules following the 2015 Summer Budget. Read on to find out how they could affect you…
In the 2015 Summer Budget, the Chancellor announced there are going to be fundamental changes to the way dividends are taxed. The changes will kick in from 6th April 2016, so individuals who extract profits from their company as dividends will need to consider whether to increase their dividend payments before this date.
When a dividend is paid to an individual, it is subject to different tax rates compared to other income. This is due to a 10% notional tax credit being added to the dividend. So, for an individual who has dividend income that falls into the basic rate band, the effective tax rate is nil, as the 10% tax credit covers the 10% tax liability. For a higher rate taxpayer at 40%, the effective tax rate on a dividend receipt is 25%.
The new dividend tax rules
From 6 April 2016…
- The 10% dividend tax credit will be abolished with the result that the cash dividend received will be the gross amount potentially subject to tax.
- New rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
- A new Dividend Tax Allowance will remove the first £5,000 of dividends received in a tax year from taxation.
The table below shows a comparison between the current and prospective tax rates…
|Dividend falls into:||Basic-rate band||Higher-rate band||Additional-rate band|
|Effective dividend tax rate now||0%||25%||30.6%|
|Rate from 6 April 2016||7.5%||32.5%||38.1%|
There will be winners and losers when the new rules are rolled out.
An example of a winner is a higher rate taxpayer who has dividend income of £5,000. In the current tax year, they will have a tax liability of £1,250 (25% of £5,000). Next year, they will have no tax liability.
An example of a loser under the new rules will be the sole shareholder of a company who takes a small salary and then dividends up to the threshold at which higher-rate tax is payable. In the current tax year, they have no income tax on the salary – as the salary is below the personal allowance – and no tax on the dividend. Next year, only £5,000 of the dividend will not be taxable.
Will trading as a limited company still be the best option for me?
If you are currently trading as a limited company you may think that to trade as a sole trader or as a partnership may be a better option for you after April 2016. In our view, there is still a benefit in tax terms for most individuals to continue trading as a limited company. The tax saved by incorporation compared to being unincorporated will be reduced next year, but there is still an annual tax saving.
Will it be better to take a dividend rather than an increase in salary?
In our view, there is still a benefit for a director-shareholder to take a dividend rather than a salary. The amount of the tax saved will be less than under the current rules.
Should dividends be paid before 6th April 2016?
If you do not currently extract all the company profits as a dividend, you may wish to consider increasing dividends before the 6th April 2016. However, other tax issues may come into play, for example the loss of the personal tax allowance if your total ‘adjusted net income’ exceeds £100,000. There will also be non-tax issues, such as the availability of funds or profits in the company to pay the dividend.
Please bear in mind that our comments are based on our current understanding of the new rules. However, the Government has only supplied brief details and there has been no draft legislation. The new rules will be legislated for in the 2016 Finance Bill. This may mean we do not see the draft legislation until the Autumn Statement in early December.
If you need any further information or advice about taking a dividend in your business, then please feel free to comment below; email me or call me on 01788 577613.