The July 2015 budget announced changes regarding the taxation of dividends effective from April 2016 – until the Finance Bill is issued a few points are still uncertain:
- The current system of tax credits is to be withdrawn – dividend income will no longer be grossed up in the personal tax computation.
- A dividend tax allowance of £5,000 is to be introduced – it is probable that the allowance will be in addition to the basic rate tax band.
- Dividends will 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 (compared to 0%, 25% and 30.56% on the net income currently).
- The current savings allowance of £5,000 will only be available against interest and similar other income.
- The new personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers will probably not be available against dividends.
A standard strategy for a small incorporated business is to extract profits primarily through dividends rather than salary and the above changes will have to be considered with future planning in mind. We would suggest considering:
- Optimising dividend income in the current tax year rather than paying an extra 7.5% on the income from April 2016.
- Income splitting with a spouse – extracting a mix of dividends and salary if the spouse is also a director and / or shareholder.
- Increasing company pension contributions.
Also, if you are currently operating as a sole trader and were considering incorporating, you will need to be generating profits of around £40,000 and above for it to become worthwhile given the associated administration costs.Share this: