Dividends – new tax rules from 1 April 2016

Through the smoke of the March 2016 budget, here is a change which was announced last year.  From 1 April 2016, a new tax will apply to company dividends, with the first £5,000 being tax-free, but above that a 7.5% tax rate will apply for the remainder of the basic-rate tax band.  For higher-rate taxpayers, the change that will hurt most is that the current tax credit of 10% on dividends will be abolished.

With many family companies using a mixture of low salary and then dividend top-ups as a means of withdrawing cash, the remainder of March 2016 are the last few days of opportunity to pay a dividend before this tax change takes effect.

Suppose that as a company director you are drawing a salary of £12,000 per year, and withdrawing a further £30,000 as dividends.  Assuming no other income, your income for 2016-17 is below the higher rate threshold which starts at £43,000 (tax-free allowance £11,000 plus the 20% basic rate band £32,000).

Under the old rules, the £30,000 dividend was in effect tax-free on you as the recipient, and not tax-deductible for the company.  Under the new rules, you will have a tax liability of 7.5% on (£30,000 less £5,000), that is £1,875.  This will arise on your tax return and be payable in the following January.

Higher-rate taxpayers will continue to suffer the 32.5% tax for dividends above the £43,000 (no change), but (a) will also suffer the 7.5% tax on that part of the dividend less £5,000 falling in the basic-rate band, and (b) will also suffer by the withdrawal of the 10% tax credit.  In other words, instead of 32.5% less the tax credit under the old rules, you will actually pay 32.5% on the excess above the higher rate threshold.

Therefore you have only until the end of March 2016 to pay any dividends under the old rules.  Should HMRC ever ask to seek your paperwork, to prove that a dividend was paid, you should be able to show the payment appearing on the bank statement, as well as having a completed and signed dividend certificate.

 

 

 

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