This is arguably the biggest tax change in recent memory for Small and Medium Enterprises.

News & blog » Dividends – Changes

April 18, 2016

Inma Fuentes Grant

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Do you trade as a Limited company and take your directors remuneration as a withdrawal of profits via Dividends?

If so, are you up to date with the changes in relation to the taxation of Dividends from this month?

It was announced in the Summer Budget 2015 that the taxation of dividends would change significantly with effect from 6th April 2016.  This is arguably the biggest tax change in recent memory for Small and Medium Enterprises.

So, what is changing in April 2016?

Under previous rules, dividends are deemed to be received net of a notional 10% tax credit. This is never actually paid over by the company or the individual receiving the dividend. So a dividend received of £100 is deemed to be taxable income of £111.11 with a £11.11 tax credit deducted.

In real terms as a basic rate tax payer, then no additional tax is payable on the dividend itself and simply the company pays corporation tax on the profits before the dividend taken.

The old rules in detail, where this dividend falls into the basic rate band, it is taxed at 10% of the gross dividend, in the higher rate band the rate is 32.5% and for additional rate taxpayers the rate is 37.5%.
After allowance for the 10% tax credit, the effective rate on the £100 cash dividend received is 0% in the basic rate, 25% in the higher rate and 30.6% in the additional rate.

From the 6th of April 2016, the 10% tax credit will be eliminated, meaning that your basic and higher rate bands will go further as your taxable income is not inflated by the tax credit.

Furthermore, a new “Dividend Allowance” will be introduced, meaning that £5,000 of taxable dividends received will not be taxed at all, irrespective of the level of your income. The complication here is that these dividends will still use up basic rate or higher rate band, so it is not a pure tax free allowance.

The bad news is that from 6th April 2016, the effective tax rates (other than on the first £5,000 in the tax year) will increase by 7.5% for all tax brackets, so 7.5% in the basic rate, 32.5% in the higher rate and 38.1% in the additional rate band. Therefore an individual now receiving a dividend will pay additional personal tax, even if they are a basic rate tax payer.

We recommend an early discussion with your accountant to ensure that you are still withdrawing your remuneration in the most tax efficient manner.

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