Changes to Tax on Dividends - Have you Started Planning?

16 February 2016 10:45

Most owner managed businesses, are remunerated by way of a small salary and dividends. The benefit of such a pay structure is that as long as your personal income remains below the higher rate threshold, there would be no tax on your salary or dividends (though of course, the profits will have been taxed in the company).

However, as from 6 April 2016, dividends in excess of £5,000 will be taxed at a rate of 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate).

This new measure is aimed to tax small companies who have the pay structure detailed above. The measure will have a harsh impact on those who work with spouses in the family business.


Let us assume a company pays its director a salary of £8,000, and votes a dividend of £33,000. The personal allowance is £11,000.

The salary of £8,000 and £3,000 of dividends are covered by the tax free personal allowance. A further £5,000 of dividends are covered by the new dividend allowance.

This means £25,000 of the dividends are taxed at a rate of 7.5%, resulting in a tax liability of £1,875. Furthermore, because the individuals tax liability exceeds £1,000, payments on account will be due in advance of the following tax year.

Compare this with the current position of no tax being payable by the individual.

What can you do?

Unfortunately, there is no “one size fits all” plan. Each case should be looked at based on its own circumstances.

In addition, some headlines suggest it is the end of incorporations – this should not be the case, and tax savings can still be made.

Planning should be undertaken before 5 April 2016. Get in touch now to arrange a FREE initial meeting. Give us a call on 01228 586790 to book one now.

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