New Dividend Tax means you will be worse off by 7.5%

We've known it's coming for a while and now it really is just around the corner ...

The New Dividend tax

From the Government who pretends that they support small businesses and will not flood them with red tape (who introduced RTI, VAT Moss, Auto enrolment?!) we now have the dividend tax.

The tax is a bit complicated and it's not strictly true that you'll be worse off by 7.5% as you'll get the first £5,000 of dividend tax free.

Here's the maths

From 6 April all dividends will be subject to tax as follows:

  • First £5,000 of dividends - tax free
  • Dividends falling within basic rate tax (caution on how this is calculated) - 7.5%
  • Dividends falling within higher rate tax - 32.5%
  • Dividends falling within the additional rate of tax - 38.1% but remember that for income over £100,000 your personal allowance starts to get restricted

Note - the 10% tax credit is abolished.

A worked example

The new dividend tax will make your head spin as your tax calculation is not as straight forward as it used to be.

Who'd have thought that we have an Office of Tax Simplification in the UK!

Anyway here's a couple of examples ...

All income below the higher rate threshold

Simon predicts a profit through his limited company before salary but after all allowable costs of £51,737.

After discussing with his accountant he agrees that a salary of £671 per month would be a good approach based upon his circumstances (see 2016 Salary and Dividends Fact Sheet).

This makes his profit £51,737 - (671 x 12) = £43,685 before tax

Corporation Tax at 20% is £8,737

So profit after tax would be £34,948

Simon takes all of the profit as dividends.

Simon's personal tax bill would be calculated as follows:

Personal allowance of £11,000 would be allocated to the salary of £8,052 leaving £2,948 to allocate to dividends.

£5,000 of dividends can be taken without any tax

So that's a total income of £16,000 without tax - £8,052 salary and £7,948 of dividends.

The remaining (£34,948 - £7,948) £27,000 of dividends would be taxed at 7.5% = £2,025.00 of tax to be paid on the dividends.

Income over the higher rate threshold

Paula predicts a profit through her limited company before salary but after all allowable costs of £57,250.

After discussing with her accountant she agrees that a salary of £671 per month would be a good approach based upon her circumstances (see 2016 Salary and Dividends Fact Sheet).

This makes her profit £57,250 - (671 x 12) = £49,198 before tax

Corporation Tax at 20% is £9,840

So profit after tax would be £39,358

Paula takes all of the profit as dividends.

Paula's personal tax bill would be calculated as follows:

Personal allowance of £11,000 would be allocated to the salary of £8,052 leaving £2,948 to allocate to dividends.

£5,000 of dividends can be taken without any tax

So that's a total income of £16,000 without tax - £8,052 salary and £7,948 of dividends.

The remaining (£39,358 - £7,948) £31,410 of dividends would be taxed as follows:

£27,000 at 7.5% = £2,025

£31,410 - 27,000 = £4,410 at 32.5% = £1,433.25

So the total tax on dividends would be £3,458.25

Note - tax at the higher rate is paid when income reaches £32,000. The personal allowance is £11,000 - so that is £43,000 of income before the higher rate threshold is reached.

£43,000 - salary of £8,052 - dividends of £2,948 - tax free dividends of £5,000 = the amount to be taxed a basic rate = £27,000

What next?

My advice is to have a chat with your accountant about what will suit you for 2016 / 2017; everyone is different and there is not a "one size fits all" option although we have given some general advice as follows, click on the heading to see more:

And finally ....

Dividend tax rule of thumb

The dividend tax rule of thumb to use is:

  • take a salary of £8,052
  • tax free dividends of £7,948
  • £75 of tax per £1,000 of dividends from £7,949 up to total dividends of £34,948
  • £325 of tax per £1,000 of dividends over £34,949

If your income exceeds £100,000 obtain a personalised quotation as it gets really complicated!