The dividend tax system was overhauled on April 6th 2016, resulting in a significant tax increase for most limited company directors.

So what has changed?

tax-blog-juneThe Government had issues with the way dividends were being taxed before April 2016 including the dividend tax credit.

The scheme originated when Corporation Tax was much higher than it is now. The Government also presumed that due to the increas in SMEs and sole traders, many directors were using their businesses as a vehicle to save tax by apportioning part of their salary into dividends.

These changes to dividend taxation will result in an unwelcome tax hike for many limited company directors, reducing the tax benefits associated with using dividends as a means of supplementing their income.

This is how the new system will work. After the personal allowance has been taken into account (£11,000 from April 2016, depending on your income), all individuals can receive £5,000 of dividend income tax free. That means if your gross income is £16,000 or less, you pay no dividend tax at all.

There are three new tax rates which apply to all dividend income in excess of £5,000 per year. After including a £5,000 ‘dividend tax allowance’, dividends are taxed at 7.5%, 32.5% and 38.1% (basic, higher and additional bands). Almost all company owners will pay more tax as a result.

Askews Accountants can advise you on the latest changes to dividend taxation. The implications of these tax changes mean your decisions will need to be carefully considered. So why not contact us to discuss your situation and to better understand which option is best for you.

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