Changes to dividend taxation

From 6th April 2016 there will be big changes to the way that dividends are taxed

If you own a limited company, then it is particularly important for you to understand the changes.
From 6th April 2016, dividends above £5,000 will be taxed at 7.5% (basic rate taxpayer), 32.5% (higher rate taxpayer) and 38.1% (additional rate taxpayer). The notional tax credit which has applied in the past will be abolished.
This can result in much higher tax bills for those who take a minimum salary from their company and top up their income with dividends.
Example
A couple run and jointly own their limited company which currently makes £55,000 a year before directors' salaries, corporation tax and dividends. They each take a salary of £8,112 and they declare dividends on the remaining profit after corporation tax. If they have no other income then they could be over £1,100 a year worse off under the new proposals from 6th April 2016.

 

Incorporation of your business

There are many reasons for trading through a limited company rather than as a sole trader. From the purely tax perspective, it is still generally cheaper if your business is incorporated. However, for those with small profits the increase in compliance costs will often outweigh any tax savings.
Example
An individual with profits of £35,000 and no other income would generally save around £800 in tax if his/her business was incorporated. However, there would be additional compliance costs such as accountancy fees for payroll, statutory accounts and corporation tax returns which would reduce this saving.

Different considerations if IR35 applies to your company

A much harsher tax regime applies to companies with contracts falling under IR35 (disguised employment). We would generally recommend that most of the profit, relating to an IR35 contract, is put through payroll rather than being paid out as a dividend. It depends on the circumstances (eg pension contributions) - speak to us if you would like more information.

About us:

We are a small firm of chartered accountants with a wide range of experience in accountancy and tax services. We have personal contact with all of our clients. Let us help you to grow your business.

01505 610412

 Woodside, Houston, Paisley, Renfrewshire PA6 7DD

 

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