The new rules on dividends
April 2016 saw significant changes to the rules on the taxation of dividends. A dividend allowance of £5,000 per annum was introduced which was in addition to an individual’s personal allowance.
Changes from April 2018
The £5,000 dividend allowance has remained in place for only two years. From April 2018 the dividend allowance is reduced from £5,000 per annum to £2,000 per annum.
The headline rates of dividend tax remain, such that from 6 April 2018 the rates of tax on dividends over £2,000 are:
- 7.5% on dividend income within the basic rate band (ordinary rate)
- 32.5% on dividend income within the higher rate band (upper rate)
- 38.1% on dividend income within the additional rate band (additional rate)
Compared to 2017/18, the reduction in the allowance effectively results in a further £3,000 being taxed at 7.5% that was previously taxed at 0%. This will result in an additional tax liability of £225 per annum.
Salary or dividend?
Historically, it has been favourable for a director-shareholder to take dividends rather than a salary. This is because a dividend is paid free of national insurance contributions, whilst a salary or bonus can carry up to 25.8% in combined employer and employee contributions. However, a salary or bonus is generally tax deductible for the company, whereas dividends are not.
So will it still be beneficial to take a dividend over a salary/bonus after the reduction of the dividend allowance comes into effect? There are still benefits for a director-shareholder taking a dividend over a salary, although the amount of tax saved will be reduced. Please ask us for further details.
Please note that this factsheet is for general guidance only. However, planning at this stage can help to save you money in the future, so please contact us for further assistance.
DISCLAIMER: This newsletter is for guidance only, and professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.