Kirkpatrick & Hopes - Succession Planning Accountants

Call us on: 0118 923 5800
Email us: mail@kirkpatrickandhopes.com

Summer Budget 2015: how it will affect you if you are paid dividends from your business  

George Osborne has just produced the most significant budget in twenty years for the tax payable by business owners. There are significant changes to the taxation of dividends.

We usually advise our company directors / shareholders to pay themselves a small salary and the rest of their ‘package’ in the form of dividends.

This has effectively enabled an individual to be paid £39,206 a year without paying any personal tax. See the previous blog here

The changes will affect everyone who is paid more than £5,000 a year in dividends.

This looks as though I will be paying more tax – is there any good news? 

There is a few small snippets of good news the personal allowance is increased to £11,000 and the notional tax credits attached to dividends are abolished.

The changes only apply from 6 April 2016.

Dividends paid before 6 April are covered by the existing rules.

Every individual can now be paid £5,000 in dividends tax free – is there an option to widen the share ownership of your business?

The workings of self assessment will mean that you will see an increase in the actual tax payments you make to HMRC from 31 January 2018.

How much tax will I pay? 

I have crunched the numbers to give you an indication of the additional tax you will have to pay from April 2016.

In all cases I have assumed that you will be paid a salary of £11,000 in addition to the dividends paid to you. I have also assumed that you have no other sources of income.

If you are paid £5,000 or less in dividends you will have no tax at all to pay. This means that you can withdraw £16,000 a year from your company without paying any tax.

The tax rate on dividends paid between £5,001 and £27,000 is 7.5%

The rate on dividends paid between £27,000 and £89,000 is 32.5%

The rate on dividends paid between £89,001 and £111,000 is 52.5%

The rate on dividends paid between £111,000 and £139,000 is 32.5%

The rate on dividends paid over £139,000 is 38.1%

There will be a small amount of National Insurance to pay on the £11,000 salary.

What does this actually mean in extra tax? 

Here are some examples. These amounts are tax paid per individual. If you pay the same amount of dividends to your spouse then you need to double the amount of extra tax payable.

If you are currently taking dividends of £28,606 a year you are currently paying no tax on your dividends; under the new rules you will pay tax of £1,770.  An extra £1,770

If you currently take dividends of £30,000 a year you are currently paying tax of £348; under the new rules you will pay tax of £1,875.  An extra £1,422

If you currently take dividends of £40,000 a year you are currently paying tax of £2,848; under the new rules you will pay tax of £4,625.  An extra £1,777

If you currently take dividends of £50,000 a year you are currently paying tax of £5,348; under the new rules you will pay tax of £7,875.  An extra £2,527

If you currently take dividends of £60,000 a year you are currently paying tax of £7,848 under the new rules you will pay tax of £11,125. An extra £3,277

If you currently take dividends of £70,000 a year you are currently paying tax of £10,348;  under the new rules you will pay tax of £14,375. An extra £4,027

If you currently take dividends of £80,000 a year you are currently paying tax of £12,848;  under the new rules you will pay tax of £17,625.  An extra £4,777

If you currently take dividends of £90,000 a year you are currently paying tax of £17,600;  under the new rules you will pay tax of £21,075.  An extra £3,475

If you currently take dividends of £100,000 a year you are currently paying tax of £22,353;  under the new rules you will pay tax of £26,325.  An extra £3,972

If you currently take dividends of £110,000 a year you are currently paying tax of £24,853;  under the new rules you will pay tax of £31,575.  An extra £6,722

If you currently take dividends of £120,000 a year you are currently paying tax of £27,353; under the new rules you will pay tax of £35,025.  An extra £7,672

If you currently take dividends of £140,000 a year you are currently paying tax of £33,160; under the new rules you will pay tax of £41,581.  An extra £8,421

If you currently take dividends of £150,000 a year you are currently paying tax of £36,216; under the new rules you will pay tax of £45,391.  An extra £9,175

If you currently take dividends of £200,000 a year you are currently paying tax of £51,494; under the new rules you will pay tax of £64,441.  An extra £12,947

If you currently take dividends of £300,000 a year you are currently paying tax of £82,094; under the new rules you will pay tax of £102,541.  An extra £20,447

Is there anything I can do to mitigate this tax bill?

The rules only apply from 6 April 2016 so all dividends paid before that date will come within the current rules.

In some cases it may be worth considering bringing forward the payment of dividends into this tax year.

For example if you normally take £45,000 a year in dividends in 2015/16 and 2016/17 you will pay total tax of £10,348 split between the two years as follows:

2015/16 £4,098

2016/17 £6,250

Whereas if you take £60,000 in dividends in 2015/16 and £30,000 in dividends in 2016/17 you will pay total tax of £9,723 split between the two years as follows:

2015/16 £7,848

2016/17 £1,875

The overall saving is £625

There are cash flow considerations in paying extra dividends the tax will be payable on the extra dividends taken this tax year on 31 January 2017, whereas tax payable under the new rules is not due until 31 January 2018

For higher rate taxpayers it may be worth considering paying personal pension contributions as opposed to personal contributions.

For some smaller business it may be better to close the company and then trade as a sole trader or partnership.  This decision should not be taken lightly as there are several other factors to consider here and not just tax.

Clients with significant amounts owed to them in their directors loan accounts may be better off if the company pays interest on the loan as opposed to taking a dividend.

The £5,000 tax free dividend amount applies to all individuals if your spouse is not a shareholder it is now worth giving her some shares and paying dividends to him or her even if they are higher rate taxpayers.

You could also consider transferring shares to other relatives you support such as adult children and other relatives. The dividends do need to be paid to them and the amounts cannot be recycled back to you.

Please contact us if you have any questions

We will be holding some webinars to explain these details and speaking to our clients to explain how the rules will apply to them. Every business owner needs to be aware of how the new rules will apply to them. I do not think there will be a ‘one size fits all solution’.  From my own personal situation I am resigned as having to pay the extra tax.

Leave a Reply