STOP THE PRESS – Shareholding company directors – read on.....

If you were walking past one of our offices on Budget day and heard a loud bang, it was the collective thud of jaws hitting the desk as the Chancellor announced the changes to the taxation of dividends.

If you, like most shareholding company directors, are remunerated by a small salary topped up by dividends, then you should be aware of increased tax liabilities coming your way. Indeed, anyone in receipt of dividends of more than £5,000 per annum will be affected by the changes announced.

At the moment, dividends are paid net of a 10% notional tax credit. From 6 April 2016, the Government will abolish the tax credit, introduce a new £5,000 dividend allowance and change the income tax rates that apply to dividend income. Basic rate taxpayers will be 7.5%, higher rate taxpayers will pay 32.5% and additional rate taxpayers will pay 38.1% from April 2016.

The intention is to increase the tax liabilities of the large number of shareholding directors who are remunerated via dividends.

This is best illustrated with an example.

Joe has his own plumbing business and on his accountant’s advice, he draws a salary up to his personal allowance (£10,600 for 2015/16 and £11,000 for 2016/17) and dividends of £28,500 (£31,667 gross), which his accountant has advised can be paid without any further tax charges. However, come April 2016, Joe will face tax liabilities on his dividend income

Income Tax Computation

2015/16

£

 

Income Tax Computation

2016/17

£

 

 

 

 

 

 

 

Salary

 

10,600

 

Salary

 

11,000

Dividends

 

31,666

2015/16

Dividends

 

28,500

Less: Personal allowance

 

(10,600)

 

Less: Personal allowance

 

(11,000)

Taxable Income

 

31,666

COMPARED TO

Less: Dividend allowance

 

(5,000)

 

 

 

 

Taxable Income

 

23,500

Tax

 

 

2016/17

 

 

 

 

 

 

 

Tax

 

 

31,666

10%

3,167

 

 

 

 

 

 

 

 

23,500

7.5%

1,763

Less: Dividend Tax Credit

 

(3,167)

 

 

 

 

 

 

 

 

 

 

 

Tax Due

 

0

 

Tax Due

 

1,763

 

 

 

 

 

 

 

(National Insurance has not been considered here)

 

As you can see, Joe will be required to pay almost £1,800 in January 2018 in respect of his 2016/17 tax bill as well as the first payment on account for 2017/18 of almost another £900. It is important that shareholding directors are aware of these changes and how they will impact their tax bills as soon as possible.

Things to consider:

1.       The ownership of any shares – utilise your spouse’s allowances and lower tax rates.

2.       Paying dividends prior to 5 April 2016.

3.       If you are carrying out research and development activities you could be better off on salary.

4.       Disincorporation –  if profits are low.

Employers allowance........further bad news

In addition, if you, the director, are the sole employee of the company, you will no longer be able to claim the employer’s national insurance allowance of £2,000 from April 2016.