In the summer budget George Osborne introduced the new dividend tax, along with a whole load of other changes, overall they are quite radical, but they do add further complication to the tax system. Here is a summary of the changes:
- The changes take effect from 6/4/16, so the first tax is due on your tax return for the year ended 5/4/17 and payable on 31/1/18.
- You will get a £5,000 dividend tax allowance. This is a tax free allowance, so it has the effect of increasing the limit when you pay higher rates of tax by £5,000.
- The 10% deemed tax will be abolished. In the past if you had £30,000 of dividends, they were grossed up at 10% to give £33,333 of income on your tax return. In the future £30,000 of dividends is £30,000 of income so you can earn more before you pay higher rate income tax.
- Corporation tax is going down from 20% to 19% from 6/4/16 and then to 18% in the future.
- The tax is set at 7.5% on your dividends over £5,000; if you are a higher rate tax payer you additionally pay your higher rate income tax on dividend income as dividend tax.
- The dividend tax is raised on dividends; dividends are paid out of the retained profits of the company; the profits of the company will have had corporation tax applied to them. Therefore the 7.5% tax is after the 19% corporation tax and so it is equal to 6.075% of the profits of the company.
If you have an owner managed company, receiving a small salary and dividends for the balance of your income, your marginal rate of changes as follows:
|Income||Tax year 2015/16||Tax year 2016/17|
|0 – 10,600||0%||0%|
|10,601 – 16,000||20%||19%|
|16,000 – 42,385||20%||25%|
|42,385 – 48,000||40%||25%|
|48,000 – 100,000||40%||45%|
|100,000 – 105,000||60%||45%|
|105,000 – 122,000||60%||65%|
So what does this mean in terms of the tax you pay?
- If you earned £42,000 pa you are c£1,300 worse off.
- If you earned £50,000 pa you are c£100 worse off.
- If you earned £100,000 you are c£2,600 worse off.
- If you earned £105,000 you are c£1,900 worse off.
One further complication is you should remember the dividend tax is a personal tax. For owner directors whose personal income is less than £42,385 they have traditionally just paid Corporation Tax. The new dividend tax is a personal tax, they will therefore have two taxes to pay in the future – the company pays corporation tax and the director/shareholder pays the dividend tax.