The new dividend tax was announced out of the blue in the budget. The key facts of the proposed changes are as follows:
- From April 2016, the notional 10% tax credit on dividends will be abolished.
- A £5,000 tax free dividend allowance will be introduced.
- Dividends above this level will be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate)
- Dividends received by pensions and ISAs will be unaffected
The proposed changes will hit small companies who pay a small salary designed to preserve entitlement to the State Pension, followed by a larger dividend payment in order to reduce National Insurance costs. Clients who were used to having a Corporation Tax bill in the company, but then no personal tax bill if they were a basic rate taxpayer will now have a personal tax bill if they pay themselves salary and dividends over the sum of the Personal Tax Allowance and the new £5000 dividend allowance.
Unfortunately this tax has been pitched at a level where for most people leaving their remuneration the same as it is at the moment is still the most tax efficient way forward, however with an additional tax burden personally.
It may make sense for clients to declare additional dividends before April 6th 2016 to avoid paying this tax in future years. It may also make sense for clients who do not need the actual cash now to pay into a pension as this further improves the tax efficiency of pension contributions.
Please do not hesitate to contact us if you would like more information or to discuss your tax plans further.