Changes to the taxation of dividend income – don’t lose out!

Changes to the taxation of dividend income – don’t lose out!

For as long as I can remember (and that’s a long time!) rumours have abounded that dividends would become subject to National Insurance.

At present there are considerable savings in National Insurance contributions (NIC) to be made if a minimal amount is paid as salary and any balance of a remuneration package is paid as dividends (particularly for shareholder directors of private limited companies).

From April 2016, the NIC status of dividends remains the same, making this strategy still valid if you want to minimise what you lose in NI.

But, unfortunately, the income tax position of dividend income is changing and this may have a direct impact on the overall savings in NIC and income tax that can be achieved.
So, if you’re a director of a private limited company, what does this change mean in real terms? Let’s take a look.
What’s changing?

From 6 April 2016, the way dividends are being taxed will change. The 10% tax credit is being abolished and you’ll have a flat rate dividend allowance of £5,000 available to you. Any dividends you receive in excess of £5,000 will be taxed as follows:

  • 7.5% if your dividend income is within the standard rate (20%) band
  • 32.5% if your dividend income is within the higher rate (40%) band, and
  • 38.1% if your dividend income is within the additional rate (45%) band

Without the tax credit, a dividend income of £30,000 received in 2016-17 would create the following, additional income tax liabilities.

Comparison of tax payable on dividend income of £30,000:
Income tax due if dividend received is £30,000 2015-16 2016-17 Increase in what you’re taxed
Dividend is within the standard rate band Nil £1,875 £1,875
Dividend is within the higher rate band £7,500 £8,125 £625
Dividend is within the additional rate band £9,167 £9,525 £358

Based on these figures, the potential impact on your dividend payment is pretty clear. You could be paying up to an extra £1,875 in tax on your £30k dividend, which is a hefty chunk of your hard-earned cash.

As you can see, this new tax on dividends will have the biggest impact for standard rate tax payers. In all cases, any tax liabilities for 2016-17 will be collected 31 January 2018. At the same time, HMRC will also add 50% of the tax liability to your first self-assessment payment on account for 2017-18, also due 31 January 2018 with a further 50% due at the end of July 2018.

Plan ahead and seek the right advice

If you’re likely to be affected by these changes, I’d advise you to take professional advice to find out the potential impact on your personal tax for 2016-17. Planning ahead and taking the right approach to your tax strategy is always good sense.

You won’t need to pay any additional tax that’s due until 31 January 2018, but there may be planning options that could be employed to lessen the blow. And, of course, here at Caplan Associates we can help.

Our years of personal tax planning experience mean we’re ideally positioned to listen to your long-term personal wealth goals and set up a tax strategy that minimises the possible effects of these income tax changes on your dividend payments.

If you’d like to talk to us about these dividend income changes, please do get in touch to arrange a chat with our tax team.