In the Summer 2015 Budget, fundamental changes were announced to the way in which dividends are taxed. The changes will affect dividends received after 6 April 2016 when the existing tax rates on dividends will be increased. Individuals who extract profits from their company as dividends may need to consider whether to increase dividend payments before this date.
Currently when a dividend is paid to an individual, it is subject to different tax rates compared to other income. Dividend income which falls into the basic rate band has an effective tax rate of nil. For a higher rate (40%) taxpayer, the effective tax rate on a dividend receipt is 25%.
From 6 April 2016:
- The 10% dividend tax credit is abolished with the result that the cash dividend received will be the gross amount potentially subject to tax.
- New rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
- A new Dividend Tax Allowance will remove the first £5,000 of dividends received in a tax year from taxation.
The table below shows a comparison between the current and prospective tax rates.
There will be winners and losers from the new regime.
Will trading as a limited company still be the best option for me?
If you are currently trading as a limited company you may think that to trade as a sole trader or as a partnership may be a better option for you after April 2016. There is still a benefit in tax terms for most individuals to continue to trade as a limited company. The tax saved by incorporation compared to being unincorporated will be reduced next year but there is still an annual tax saving.
Will it be better to take a dividend rather than an increase in salary?
There is still a benefit for a director-shareholder to take a dividend rather than a salary. The amount of the tax saved will be less than under the current regime.
Should I take dividends before 6 April 2016?
If you do not currently extract all the company profits as a dividend you may wish to consider increasing dividends before the 6 April 2016. However, other tax and non-tax issues may affect this such as the ability of the company to pay dividends and the tax position of the shareholder.
Please note that our comments are based on our current understanding of the new regime..
If you wish to discuss the implications of these new rules in your specific circumstances please contact us. We will be contacting all our clients who are limited companies to discuss the new dividend regime in the very near future.
You should always take specific advice in relation to your own circumstances as this article can only provide a guide.