One of the key announcements from the summer Budget was George Osborne’s complete overhaul of the dividend taxation system.
From April 2016, dividend tax credits will be scrapped and replaced by new rates of taxation for all limited company shareholders.
Every taxpayer will be entitled to a new £5,000 tax-free dividend allowance, which is in addition to the £11,000 personal allowance in 2016/17. Anything above that will fall into new tax rates, which have the same earning thresholds as income tax:
• Basic rate (7.5 per cent) for earnings up to £43,000
• Higher rate (32.5 per cent) for earnings up to £150,000
• Additional rate (38.1 per cent) for earnings above £150,000
As the current dividend tax regime was designed at a time when Corporation Tax was extremely high, it is hoped that the reforms will reduce tax motivated incorporation from limited company owners who typically pay themselves small salaries and extract the bulk of their income in the form of dividends.
According to the Government’s initial estimates, the simpler system is expected to raise £2.54bn during 2016/17 alone, which means a hike in tax bills for many limited company shareholders.
How much tax will I actually pay?
The Government is yet to iron out all the finer details, but here are our expectations of how the changes are likely to work.
Do remember that any dividend income that pushes your total earnings above the next tax band threshold will only be charged at the higher rate on the portion which is exposed.
| Salary | £8,000 | £20,000 | £40,000 |
| Dividend income | £20,000 | £40,000 | £80,000 |
| Remaining personal allowance | £3,000 | £0 | £0 |
| Tax (2016/17) | £900 | £6,875 | £24,375 |
| Tax increase compared to 2015/16 | + £900 | £1,911.62 | £4,375 |
Until the exact details of the reforms are made public, be sure to approach dividend tax with caution and seek professional advice before making any decisions.
Talk to our tax planning experts today on 0161 703 2500.
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