What is Dividend Tax?
If you own shares in a private or a public limited company, you may receive dividends. This dividend income is taxable, and the tax on it is called dividend tax.
New Tax Threshold for Dividend Income
Currently, each person can receive £5,000 tax-free dividend income per person. From 6th April 2018, this amount is changing. The amount of dividend income you will be able to receive tax free as an individual will reduce to £2,000 per annum. This change will apply to all shareholders – from pure investors to director shareholders.
“Many small business owners trade through their own limited company and pay themselves via a small salary plus a dividend out of the retained profits of the business,” explains Suzanne Spicer of Spicer & Co Chartered Accountants in Dunstable. “The new, lower threshold for applying dividend tax may mean that a review is needed. This will ensure that each owner’s business and personal finances remain as tax-efficient as possible.”
This new threshold for applying tax to dividend income is expected to raise an extra £800m to £900m per year for the Treasury. (Source – budget documentation.)
Dividend Tax Exemptions & Rates
Dividend income from ISA investments is exempt from tax. Your first £2,000 income from non-ISA dividends is also tax-free. If you receive more than £2,000 income from your dividends, the tax rates that apply are:
– 5 per cent for basic-rate taxpayers
– 5 per cent for higher-rate taxpayers
– 1 per cent for additional-rate taxpayers.
How Does This Change Affect Small Limited Companies?
Small businesses often face the choice of being set up as a limited company, or operating as a sole trader/partnership. “Despite the changes to dividend tax, it is still more tax efficient to be a limited company at certain levels of income,” says Suzanne. “It’s best to check with your accountant, as your circumstances beyond your dividend income should be considered.”
Is Savings Interest Affected?
There is no imminent change to how your interest from your savings is taxed, although we think that dividends will be brought into line with savings eventually.
The threshold for paying interest on savings income is:
– £1,000 for basic rate taxpayers
– £500 for higher rate taxpayers
– Nil for additional rate taxpayers (all savings interest income will be taxable)
What Should You Do Now?
If you’d like to discuss how the change in dividend income tax thresholds affect you and/or your business, pop in for a chat. We’re here to help and always welcome the chance for a coffee!