As you may be aware, the Government is proposing new rates of tax for company dividends paid out from 6 April 2016. Hitherto, there has been an overall saving for owner managed businesses because there was only tax on dividends received, whereas salary payments or self employment income attracted both tax and National Insurance and this new legislation is designed to mitigate that advantage. The proposals mean that the tax rate on dividends will increase from 6 April 2016, partially offsetting the National Insurance saving, although not entirely.
The main consideration for anyone with accumulated profits within their company is whether to pay out dividends before 5 April 2016 which might otherwise have been paid later, thereby beating the tax hike.
There are more details below but, as is often the case with taxation, the rules aren’t straightforward and there is also a tax free dividend allowance of £5,000 per annum being factored in, so some people, such as those with a small investment portfolio, may actually be better off.
- The first £5,000 of dividends received will be taxed at 0% (ie tax free under the allowance)
- The first £5,000 of dividends will continue to count towards your taxable income total, potentially pushing other income in to higher tax rate bands.
- Further dividends falling within the 20% Basic Rate Tax Band will be taxed at 7.5% from 6 April 2016 (Remember that the company will have already paid, say, 20% Corporation tax on the profits being distributed)
- Further dividends falling within the 40% Higher Rate Tax Band will be taxed at 32.5% from 6 April 2016 (Again, the company will have already suffered Corporation Tax thereon)
- Further dividends falling within the 45% Additional Rate Tax Band will be taxed at 38.1% from 6 April 2016 (Again, the company will have already suffered Corporation Tax thereon)
- Although the three rates above appear lower than the prevailing Income Tax Rates, once combined with the Corporation Tax already paid, the aggregate taxation will exceed the Income Tax rates, thereby offsetting any National Insurance saving.
- There will be no Tax Credit attached to the dividends as has been the case hitherto
- Shares held in ISAs are excluded from this treatment, as are shares held in exempt Pension Funds.
EFFECTIVE TAX RATES AT A GLANCE:
|Basic rate taxpayers||nil%||20%||7.50%||26%||7.50%||25.08%|
|Higher rate taxpayers||25%||40%||32.50%||46%||32.50%||45.33%|
|Additional rate taxpayers||30.55%||44.44%||38.10%||50.48%||38.10%||49.86%|
* For dividends in excess of the £5,000 tax free allowance
** In 2017/18 Corporation Tax is scheduled to fall to 19%
What is important is that you consider whether it is worth bringing any dividend payments forward to a date before 5th April 2016 to mitigate the tax impact. Please make contact if you wish to discuss it with us.