It is common for company directors and shareholders to take money out of their company by way of a dividend, plus a small salary, to make use of National Insurance Contribution (NIC) exemptions, credits and, in some cases, personal allowances. This is currently the most tax efficient option for many directors.
New tax rate on dividend income
However, the Chancellor announced in the Summer Budget 2015 that there would be major changes to the taxation of company dividends. From April, the new tax rate on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.
Currently, the amount of tax paid is reduced by notional tax credit, meaning that basic rate taxpayers pay no tax on dividend income, higher rate taxpayers are charged 25% and additional rate taxpayers pay 30.55%. However, from April, a basic rate taxpayer will pay £75 in tax on every £1,000 net dividend over the £5,000 tax credit. Higher rate taxpayers will pay £325 on dividends above the threshold, where previously they would have paid £250; and additional rate taxpayers will pay £381 per £1,000, where they currently pay £306.
Basic rate tax vs. higher rate tax
|
|
Until April 2016 |
£ owed on every £1,000 net dividend |
After April 2016 |
£ owed on every £1,000 net dividend |
|
Basic Rate Tax |
0% |
0 |
7.5% |
75 |
|
Higher Rate Tax |
25% |
250 |
32.5% |
325 |
|
Additional Rate Tax |
30.56% |
306 |
38.1% |
381 |
Sole employee directors no longer eligible for Employment Allowance
George Osborne also announced that from April 2016, companies where the director is the sole employee will no longer be able to claim Employment Allowance for NIC. If this affects you, you may want to speak to an advisor about the benefits taking on an employee in order to continue receiving NIC credit; as the highest rate of NIC credit will increase to £3,000 from April.
There are a few other steps company directors can take to legally minimise tax paid on income, including making full use of your ISA allowance, considering a self-invested personal pension (SIPP) and investing in Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCTs), which are all tax free.
Speak to your advisor about the best option for your business.
What do you think to the new dividend tax? Will it affect the way you take an income from your business? Let us know in the comments, or join the conversation on Facebook and Twitter.
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