The following information details some changes to dividend tax. We will be writing to our company director clients in January 2016.

The new “Dividend Allowance”

A new £5,000 dividend allowance is being introduced.  If your dividend income is less than £5,000 per tax year, regardless of whether you are a basic rate, higher rate or additional rate taxpayer, you will have no income tax to pay on those dividends.

However, as the owner of a limited company, you are more than likely to be taking a small “personal allowance” sized salary with the rest of your remuneration via dividends.  If this is the case then you will still benefit from the £5,000 dividend allowance, but it will only save you income tax at the rate of 7.5% = £375.

The new dividend tax rates for the 2016/17 tax year are as follows:

  • Within the £43,000 basic rate band = 7.5%. (Up by 7.5%)
  • Within the higher rate tax band of £43,000 – £150,000 = 32.5%. (Up by 7.5%)
  • Within the additional rate tax band of £150,000 upwards = 38.1%. (Up by 7.5%)

 As you can see, these tax rates are all 7.5% higher than at present.

To give you an example, if you take a personal allowance salary of £11,000 for the 2016/17 tax year with dividends of £32,000 this takes you up to the limit of the basic rate tax band of £43,000.  Currently there would be no income tax charge, but for the 2016/17 tax year your income tax liability will be £3,037.50 in January 2018 and £1,012.50 in July 2018.  The calculation is as follows:

  Currently 2015/16   From
Dividends £32,000.00 £32,000.00
Tax free allowance N/A (£5,000.00)
Tax due rate 0% 7.5%
Tax due £0 £2,025.00
Payment on Account £0 £1,012.50
Tax due on 31/1/17 £0 31/1/18 £3,037.50
Tax due on 31/7/17 £0 31/7/18 £1,012.50

This means that in the majority of cases there will be more income tax for you to pay personally if you continue to take the same amount of dividends from your company.

If your business has undistributed profits from previous years then it is worth considering a “one-off” additional dividend before 5 April 2016 as this will potentially save 7.5% income tax.

Some good news! – Corporation Tax Rates

It has already been announced that the Corporation Tax rate will be reduced from 20% down to 19% on 1 April 2017.  Then with effect from 1 April 2020 it is expected to fall to 18%.  Clearly this does compensate somewhat for the increased dividend tax rates but we have to wait a while for the drop.

In addition, after a lot of changes in recent years, the Annual Investment Allowance for the cost of most plant and machinery (not cars) will be set permanently at £200,000 from  1 January 2016 which should be sufficient for the majority of businesses.