As you may well be aware, in the Autumn budget there were changes announced to the way dividends are taxed. We were all hopeful these would not stick, however, as no further announcement has been made, these are now likely to stay in place, and come into effect as of 5th April 2016.
Whilst this means that many businesses will now face additional personal tax bills from next year, there are opportunities for those that take action prior to 5th April 2016.
There will now be a tax free dividend allowance of £5,000 (in addition to your personal allowance of £11,000). The first £5,000 of dividends that you draw beyond your personal allowance will be tax free.
Any dividend income above this will be taxed at 7.5%, up to a total dividend income of £32,000 (don’t forget that your first £5,000 of dividends uses up part of this £32,000). For dividend income above this and to £150,000, the tax rate will be 32.5%, rising to 38.1% for dividend income above £150k.
From 5th April 2016, if you only receive income from your business we’d recommend a basic salary of £8,060. Assuming this, here’s a few scenarios that will help you stay beneath particular tax thresholds:
The maximum dividend that can be taken without incurring any personal tax is £7,940.
Once an individual’s tax bill for the year is over £1,000, then you are required to make Payments On Account towards your following year’s tax bill. You pay these amounts in January and July each year and they are calculated by taking the current year’s tax bill and dividing it into two equal chunks. Payments On Account are made in advance, so if you can avoid having to pay them, you’ll improve your personal cash flow.
If you do not want to make Payments On Account for the following year, then the maximum dividends you can take is £21,273. This leads to a tax bill of £999.98, which will be payable by 31 January 2018.
Maximum dividends: £34,940
Tax bill: £2,025, plus Payments On Account for the following year of two lots of £1,012.50.
Tax payable by 31 January 2018: £3,037.50.
Second Payment On Account payable by 31 July 2018: £1,012.50
This can be more complicated if you have income from other sources. If this does apply to you, we may need to do some additional planning calculations for you – in which case you should contact us.
Use up at least all of your basic rate band dividends for the tax year ending 5th April 2016 – even if the cash isn’t in the business. To do this, and to ensure it’s executed properly, speak to us.