Of all the announcements in the recent budget, the changes to dividend tax will cause the most unrest to small businesses.
Dividend tax credit to be removed
For many years dividends have come with a 10% tax credit which means that there’s no additional personal tax to pay on dividends received by basic rate taxpayers – the basic rate of tax on dividends is currently 10%. However, the Summer Budget has announced that this tax credit will disappear. It will be replaced with a tax-free dividend income allowance of £5,000. This will come in to affect from April 6th 2016.
Any dividends received above this will be taxed at:
- 7.5% (current rate is 0%) for basic rate taxpayers
- 32.5% (current rate is 25%) for higher rate taxpayers
- 38.1% (current rate is 30.1%) for higher rate taxpayers
Example:
One-man company with annual profits after corporation tax of £30,000. In 2015/16 the typical advice is to take an annual salary of £10,600 to cover their personal allowance. The remaining £19,400 taken as dividends.
Under the current rules the client has no personal tax to pay.
Under the new rules, the director will suddenly have a personal tax bill to pay of £1,080 ((£19,400 – £5,000) x 7.5%) – quite a shock for many clients.
As a result we will be looking at whether certain companies should disincorporate.
Our key advice regarding dividend tax:
Maximise the dividends taken up to 5 April 2016 to take advantage of the lower tax rates.
There will also be no employment allowance for one-man companies
On top of the dividend changes, it was also announced in the Summer Budget that the employment allowance will be abolished for one-man companies from April 2016. Therefore, the optimum salary for one-man companies will fall back to the lower NI threshold rather than the personal allowance threshold. This means potentially more profits being subject to corporation tax.
If you need any further advice on dividend tax, or the abolition of the employment allowance for one-man companies, please get in touch! You can email us at: markcarr@streetsweb.co.uk or call us on: 01273 778802.