Those of you who manage your own limited companies should be aware by now that the tax on dividends will increase from the start of the next tax year on 6th April 2016.
Up until now dividends that fall within the basic rate band do not attract any tax under self-assessment at all. This means that for the current tax year, 2015/16, assuming you receive a salary of £10,000, you can pay yourself dividends from your company of up to £29,147 without having to pay any tax under self-assessment. Dividends above that limit attract tax at an effective higher rate of 25% and, if you are an additional rate tax payer (income above £150,000 per annum), dividends falling into the additional rate are taxed at an effective rate of 30.56%.
It’s all change in 2016/17. There will be a nil rate band of £5,000, which means that the first £5,000 of dividends will be tax free. Dividends will then be liable to tax at 7.5% in the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band. (In 2016/17 £11,000 will be the tax free personal allowance. The next £32,000 of income will constitute the basic rate band, and so income above £43,000 will fall into the higher rate band. Income above £150,000 will be taxed at the additional rate.)
Please click on the link below to a table showing the increase in tax in 2016/17 compared with 2015/16 for various levels of dividend. The table assumes that you are taking a modest salary of £10,000 per annum in addition to your dividends.
The table highlights increases in tax payable in 2016/17 compared with 2015/16 assuming a salary of £10,000 and the following levels of dividend:
|Dividend Level||Increase in Tax Payable|
I have highlighted above and also on the table dividends of £29,147. This is the maximum amount of dividends you can draw in 2015/16, assuming a salary of £10,000, that you can take without having to pay any tax under self-assessment for that year. In other words, if you are used to receiving dividends in the basic rate band only and not paying any tax under self-assessment, from 2016/17 onwards under this model you will have tax to pay of up to £1,735.99 to pay for the first time. This balancing payment for 2016/17 will fall due on 31st January following the end of the tax year, so 31st January 2018. You may also have a first payment on account to make for the 2017/18 tax year by the same date comprising 50% of your balancing tax payment for 2016/17. An equal payment on account for 2017/18 will fall due by 31st July 2018.
On reading this you may wish to plan to increase the dividends you take for the remainder of the current tax year to 5th April 2016, before the tax on dividends increases. I hope that the information given here will aid your decision making process. If you would like to discuss your personal situation with me in relation to this issue, however, please get in touch.
This additional tax on dividends is bound to come as an unwelcome surprise to owners of small limited companies, especially if they are basic rate taxpayers who have thus far successfully avoided tax under self-assessment. However, despite this increased tax on dividends, given rates of Employer’s national insurance of 13.8% and Employee’s national insurance of 12% on salaries under PAYE, owning your own limited company and paying yourself a judicious mix of minimal salary and the bulk of your remuneration in dividends remains the most tax effective choice for most small business owners.
I look forward to hearing from any of you affected by the issues raised in this article who would like to discuss your options with me.