The new dividend tax regime – Extract more for less tax!
14th June 2016
It was widely reported that the additional 7.5% tax on dividends starting in this tax year would be an additional cost to small business owners looking to extract monies from their company.
However the change in the rules could be of benefit to shareholders in certain instances. This is due to the removal of having to ‘gross up’ dividends that was enacted at the same time as the new tax came in on 6 April 2016.
In effect this meant that previously a person would hit the higher rate of tax earlier as the amount taken out as dividends were grossed up for tax purposes.
Therefore from 6 April 2016 there are additional dividends that can be taken out before a person hits the higher tax rate.
As an example if a person was receiving a salary of £8,000 in 2015/16 they could take an additional £30,947 in dividends before they reached the higher rate of tax. In 2016/17 with the same level of salary, a person could extract £35,000 of dividends before reaching the higher rate of tax.
Therefore this extra £4,053 taken out of the company would be taxed at 7.5% rather than effectively 25% under the old rules, a saving of £709 tax on this additional amount.
The effect is even more striking when looking at the £100,000 level where personal allowance start to be lost.
If at the same £8,000 salary level a person received a dividends of £82,800 in 2015/16 this would take the total income to £100,000 (once the dividends are grossed up). This would result in a tax bill of £12,963.
Any further dividends above this level would have resulted in personal allowances being lost. In 2016/17 the same person could take another £9,200 of dividends before this would take effect. This extra amount would now be taxed at 32.5% compared to 43% under the old rules, a saving of £962 tax on this additional amount.
Although it would be unlikely most people would have taken additional amounts to go into higher rates previously, this illustrates that the new rules are not all bad news. An additional 7.5% tax on distributions is actually a better rate that which would be applicable to a person if they waited to sell or liquidate their company and paid capital gains tax at 10% (with Entrepreneurs Relief), so in relative terms the tax is not the most punitive.
Author: Alex Koupland, Manager @ Plus Accounting, Chartered Accountants
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