New Dividend Tax: Summer 2015 Budget
Dividend tax credits will be replaced with a zero-rated band of £5,000 of dividend income for all tax payers as from 6/4/16. The tax effect of this is that Taxpayers who receive significant dividend income will obviously pay more tax from 6/4/16 IE 7.5% more except for the first £5,000 of dividend income.
From this date, Income Tax Rates on dividend income apart from the first £5,000 will be 7.5% for basic rate tax payers (up to £43k per year); 32.5% for Higher Rate tax payers (on earnings above £43k per year) and 38.1% for Additional Rate Tax payers (on income above £150k per year).
Technically, HMRC have recently clarified that the £5k is not an “allowance” but a zero-rated band.
Earning income via your own ltd company by taking a small salary and high dividends as opposed to via employment will still be more beneficial though mainly due to the National Insurance position (no NI is payable on dividend income) – for example remuneration of £43k would see the contractor approx £2k pa better off; or with £64k, approx £4k better off. Additional income from the VAT FRS scheme along with tax allowable expenses that can be taken from your company should also be considered as additional benefits in addition of course.
As the tax on dividend income will increase as from 6/4/16, generally it is advisable to maximise your dividend income up to 5/4/16 especially for earners with £150k or less in this tax year.
Dividends paid within pensions and ISAs will remain tax free and are unaffected by the changes.
Contractors Share –splitting with their spouse will be an even more attractive proposition in the new tax year: for instance contractor taking £8k in salary and taking £70k in dividends next tax year will pay approx. £13,400 in income tax; whereas a contractor taking £8k in salary and £35k in dividends who splits the shareholding 50/50 with their spouse (who also earns £8k in salary and £35k in dividends) will each only pay £2,025 income tax (total for the 2 of them £4,050) leading to a tax saving of £9,350.
As an alternative to taking dividends (especially as from 6/4/16 onwards), setting up/enhancing payments into a pension scheme (where your company makes tax allowable contributions into your pension fund) must be considered even more from 6/4/16.
Graeme Bennett ACMA MBA