The new basis of taxing dividends, which will come in from 6 April 2016, is particularly targeted at company owners who draw profits as dividends rather than as salary in order to avoid paying National Insurance contributions.
The current 10% tax credit awarded with paying dividends is to be replaced by a tax-free dividend allowance of £5,000 for basic, higher and additional rate taxpayers.
Once the allowance is exceeded, dividends will be taxed at:
7.5% within the basic rate band.
32.5% within the higher rate band.
38.1% within the additional rate band.
Overall, the effect of these changes will be to increase the rate of tax on dividends above the tax-free allowance by 7.5% compared with current rates.
The allowance is not quite as generous as it could be, because it counts towards the basic and higher rate bands – effectively acting as a nil-rate band.
Owners typically draw a small amount of director’s remuneration to preserve their entitlement to the state pension and take the remainder of their drawings as dividends.
Under the proposed changes, from 2016/17 business owners could see a substantial increase to their personal tax liabilities.
We will be expanding of the effects of taxation of dividends in future issues but should you wish to discuss the matter now, please contact us on 01665 710547.