Changes to the taxation of Dividends from April 2016

The New Dividend Allowance

From April 2016 a new annual tax-free Dividend Allowance replaced the 10% Dividend Tax Credit.

The new allowance means that no tax is payable on the first £2,000 for 2018/19  ( 2017/18 £5,000) of total dividend income.  This includes dividends from your own limited company plus any received from any other source such as shares or investments.

It is available to everyone irrespective of the level of non-dividend income they receive.

The Dividend Allowance does not reduce your total income for tax purposes but simply means that you don’t have any tax to pay on the first £2,000 for 2018/19 (2017/18 £5,000) of dividend income you receive each tax year.

Changes to the headline dividend tax rates

Dividends received above the dividend allowance will be taxed as follows:

  • 7.5% on dividend income within the basic rate band
  • 32.5% on dividend income within the higher rate band
  • 38.1% on dividend income within the additional rate band

Note the “old” 10% tax credit no longer applies.  This means you no longer have to gross up the net dividend value you receive.  However, the full rates above are used against each tax band to calculate the tax payable.

Under these changes individuals with significant dividend income will pay more tax, however, there are a number of planning methods that may help  to reduce the tax you pay.  You can explore which planning methods may be right for you with one of the Brookson Financial Services team.

Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an Individual Savings Account (ISA), will continue to be tax free.

Examples

Following are some examples using the 2018/19 tax rates as follows:

Tax Band

Amount

Salary Tax rate

Dividend Tax rate

Personal Allowance

 £11,850

Nil

Nil

Basic Rate Band

£0 to £34,500

20%

7.5%

Higher Rate Band

£34,500 to £150,000

40%

32.5%

Additional Rate

£150,001 and above

45%

38.1%

 

Example 1

 “I receive a director’s fee of £8,424 and dividend income of £12,000 from my company”

 The salary of £8,424 is more than covered by the personal allowance of the same amount. The excess personal allowance  of £3,426 is offset against the dividend income, leaving £8,574 taxable.  Once we deduct the £2,000 dividend allowance from dividends, then the residual amount  of £6,574 is taxable at 7.5% basic dividend rate. You will therefore pay £493.05 of tax. 

 Example 2

 “I receive a director’s fee of £8,424 and receive dividends from my company of £40,000.

 The salary of £8,424 is more than covered by the personal allowance of the same amount. The excess personal allowance  of £3,426 is offset against the dividend income, leaving £36,574 taxable.

The £36,574 is taxable as follows:

 £34,500 falls in the basic rate band.  After deducting the £2,000 dividend allowance, £32,500 remains taxable at the basic rate of 7.5%.  The excess of £2,074 falls in the  higher rate tax band and is taxed at 32.5%.  You will therefore pay £3,111.55 of tax.

Example 3

 “I have a received a salary of £8,424 from my company, £7,000 income from property and receive dividends of £22,000.”

 Of the £15,424 non-dividend income:

 - £11,850 is covered by the Personal Allowance

 - the remaining £3,574 to be taxed at Basic Rate

 Of the £22,000 dividend income:

 - the Dividend Allowance covers the first £2,000

 - the remaining £20,000 of dividends to be taxed at the Basic Rate (7.5%)

Example 4

I receive a salary of £40,000 and also receive £9,000 in respect of my company dividends.

 Of the £40,000 non-dividend income, £11,850 is covered by the Personal Allowance, leaving £28,150 to be taxed at basic rate.

 There is £9,000 dividends left to be taxed.

 We can offset £2,000 of the dividend allowance to use up our basic rate band up to £30,150, with  £4,350  of dividends being taxed at the basic rate band. The remaining £2,650 is taxed at 32.5% as it falls in the higher rate band.

Paying a dividend –prior to 5th April  2016

A net dividend is the amount that you, as the director of your limited company, have voted to take out of your company based on the above considerations. It is known as a net dividend because you receive it net of tax. The tax you effectively, but don’t actually pay, is known as the tax credit. The dividend you are paid represents 90 per cent of your 'dividend income'. The remaining 10 per cent of the dividend income is made up of the tax credit.

If you pay tax at the higher rate you pay a total of 32.5 per cent tax on dividend income inclusive of tax credit where this falls above the basic rate Income Tax limit (£31,785 for the 2015-16 tax year). In practice you owe only 25 per cent of the dividend paid to you after the tax credit has been taken into account.

You pay a total of 37.5 per cent tax on dividend income that exceeds the higher rate Income Tax limit (currently £150,000). Because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit, in practice you owe only 30.6 per cent of the dividend paid to you.

Dividend income, like savings income, is taxed after your non-savings income, wages and self-employment profit, at your highest tax rate. For example, if it falls both sides of the £31,785 basic rate tax limit, it will be taxed partly at 10 per cent (and covered by the tax credit) and partly at 32.5 per cent (less the 10 per cent tax credit). If you normally complete a tax return you'll need to show the dividend income on it.

Any Higher Rate Tax is due to be paid by 31 January following the end of the tax year. For dividends received in the tax year ended 5 April 2015, for example, the tax is due by 31 January 2016. Remember that you and your company are separate legal entities. You should pay the Corporation Tax bill from your company bank account and your personal tax from your personal bank account.

Your personal and company's financial and tax position should be carefully considered before utilising available company funds.

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