The Taxation of Dividends is Changing…

Posted on 7th October 2015 by Alexis Outram -  What's trending?


Image to represent The Taxation of Dividends is Changing…

Some detail is still awaited but the new measures would appear to have two main objectives:

  • Simplifying the tax system for those taxpayers with relatively modest dividend income
  • Reducing the advantage of running a business through a limited company

Currently, dividend income is received net of a non-repayable tax credit of 10%.  If the gross dividend is covered by your Personal Allowance (£10,600 for the 2015/2016 tax year), or falls within your Basic Rate tax band (the next £31,785 for 2015/2016), then no further tax is due.

Above this level, additional tax is currently charged at 25% of the amount received, or 30.56% if you are an additional rate taxpayer with income over £150,000. 

The new proposal is to remove the tax credit from the dividend; what you get is what you will be taxed on. If you pay tax at basic rate, you will be taxed at 7.5%, increasing to 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. 

In addition, a Dividend Allowance will be introduced which will tax the first £5,000 of dividend income at 0%, irrespective of your tax bracket. 

An individual receiving less than £5,000 dividend income per year should see little effect on their liabilities and it should even reduce liabilities for those at higher rates.  However, once dividend income exceeds the allowance, the position starts to reverse.

So how does this affect you if you run your business through a limited company?

A well used method of extracting profits from a company is to take a relatively low salary to use most of your Personal Allowance and then to declare a dividend to utilise the basic rate tax band; in this way, around £38,000 may be extracted from the company with no personal tax liabilities for 2015/2016.  When taking into account corporation tax on profits too, this has been the most tax efficient method of taking funds from a company.

If we continue with this policy going forward, then, by taking the same dividend and salary in 2016/2017, you would be worse off by £1,650.  However, the withdrawal of the tax credit could result in further dividends being payable within the basic rate band, depending on your circumstances, thus negating the reduction.

The Government specifically stated that they wanted to reduce the incentive to incorporate a business and remunerate using dividends but it appears that this was not aimed specifically at those wanting to take relatively modest drawings; the greater liabilities will fall on those paying tax at the higher and additional rates.

There are many factors to be taken into account when deciding on a remuneration strategy, or whether to trade as a sole trader, partnership or limited company; none of these decisions should be taken without the necessary advice and looking at the full picture.


No Advice

The content produced and presented by Streets is for general guidance and informational purposes only. It should not be construed as legal, tax, investment, financial or other advice. Furthermore, it should not be considered a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset. The information provided by Streets is of a general nature and is not specific for any individual or entity. Appropriate and tailored advice or independent research should be obtained before making any such decisions. Streets does not accept any liability for any loss or damage which is incurred from you acting or not acting as a result of obtaining Streets' visual or audible content.

Information

The content used by Streets has been obtained from or is based on sources that we believe to be accurate and reliable. Although reasonable care has been taken in gathering the necessary information, we cannot guarantee the accuracy or completeness of any information we publish and we accept no liability for any errors or omissions in material. You should always seek specific advice prior to making any investment, legal or tax decisions.


Expert insight and news straight
to your inbox

Related Articles


How do you avoid financial forecasting that ends up with rain instead of sunshine?

Financial forecasting can often feel like the weather forecast, financial predictions not always being as rosy as planned, or in many cases, as hoped - a bit like the weather whilst sunshine is predicted rain all too often can be the outcome.  Whilst many businesses will look to ...


Working Capital Cycle

The longer the working capital cycle, the more time it takes for your business to get a robust cash flow. It’s good practice for businesses to manage their cycle by looking at each step where possible. This could be by selling stock or product quicker, collecting monies owed ...


Payrolling of benefits in kind to become mandatory

HMRC has announced that from April 2026 the reporting and paying of Income Tax and National Insurance Contributions (NICs) arising on benefits in kind provided to employees, must be collected through the employers payroll. What is the current position? Currently, taxable benefits and expenses must be reported to ...


You might also be interested in...