The way dividends are to be taxed is to change from April 2016 and will see basic-rate taxpayer subject to a new levy of up to 7.5%.
The Government expects to raise £6.8 billion over the next five years by replacing the dividends tax credit with a tax-free dividend allowance of £5,000, with higher taxes on income above that. Another point to consider is that dividend income can also be covered by personal allowance, the amount of income you can earn before being taxed, which will be £11,000 from April 2016 (£10,600 previous year), so someone who receives the entirety of their income in dividends could receive up to £16,000 tax free.
See below dividend tax rate table comparison:
New rules 16/17 (from April 2016)
Old rules 15/16
I.E.: Effective dividend tax rates
The proposed changes are aimed to tax small companies who pay a small salary designed to preserve entitlement to the State Pension, followed by a much larger dividend payment in order to reduce National Insurance costs.
Examples:
Example 1 –You have dividend income of £ 5,000 or less per year. You will pay no tax on your dividends, even if you are a higher rate taxpayer. Your dividends are covered by the £ 5,000 dividends allowance.
Example 2 – Your total income (not dividends – example salary) is less than £ 11,000 your income is covered by your personal allowance £ 11,000 and your dividend allowance £5,000 is effectively unused.
Example 3 – Your dividend income is £ 16,000, you will pay no tax (you are using your personal allowance of £ 11,000 plus £ 5,000 dividends allowance)
Example 4 – A salary of £ 6,500 and dividend income of £ 12,000
Salary £ 6,500
Personal Allowance £ 11,000
Total unused allowance (£ 4,500)
Dividend income £ 12,000
(-) unused allowance £ 4,500
Total £ 7,500
(-) Dividends Allowance £ 5,000
Dividends to be taxed £ 2,500 x 7.5 % = £187.50
Example 5 – A salary of £ 20,000 and dividend income of £ 6,000
Salary income £ 20,000
(-) Personal allowance £ 11,000
Total £ 9,000 x 20% = £ 1,800
Dividends income £ 6,000
(-) Dividends Allowance £ 5,000
Dividends to be taxed £ 1,000 x 7.5 % = £ 75,00
Total tax £ 1,875 (Excluding Employer NIC and Employee NIC)
Example 6 – A salary of £ 156, 00 per week as a director totalling £ 8,112 and dividends of £ 8,000 per year.
Salary income £ 8,112
(-) Personal allowance £11,000
Unused allowance (£ 2,888)
Dividends £ 8,000
(-) unused allowance £ 2,888
Total £ 5,112
(-)Dividend Allowance £ 5,000
Total £ 112 x 7.5 %= 8.40 (Excluding NIC1 Employer and NIC1 Employee)
If you have any question about this change, please call us 020 7328 8338 or send an email torodolfo.b@verticeservices.com
Best wishes
Rodolfo Basilio
Vertice Services director
