FUNDAMENTAL CHANGES TO THE TAXATION OF DIVIDENDS – SUMMER BUDGET 2015
As part of his Summer Budget speech held on 8th July 2015, the Chancellor announced fundamental changes to the
way in which dividends are taxed for individuals.
We have reviewed the detail of the measures, which are due to take effect from 6 April 2016. Consequently we
would advise that that all shareholders of companies which yield dividends should take stock of their affairs now,
before this change takes place.
The current regime
Dividend income is currently taxable at various rates:



Basic rate taxpayers – 10%, giving an effective rate of 0% after deducting the tax credit;
Higher rate taxpayers – 32.5% (an effective rate of 25% on the net dividend);
Top rate taxpayers – 37.5% (an effective rate of 30.6% on the net dividend).
However, the taxation of dividends has never been particularly straightforward. Net dividends, being the amount of
cash actually received, must be ‘grossed up’ in order to ascertain the amount to be assessed to tax for individual
shareholders. Although this does lead to a tax credit which can later reduce the amount of tax payable on the total
dividends received, the calculation required to reach this point has traditionally seemed onerous.
Despite this complexity, for owners of limited companies there are advantages to the availability of the tax credit.
Under current rules it is possible for a company to pay a low salary to shareholder/directors which can then be topped
up by further payments by way of dividends, up to the basic rate band limit. The company pays corporation tax on
profits made at the relevant rate, but the application of the tax credit means that it is possible that no further income
tax is payable by the shareholders on extraction.
By way of example, during the current 2015/16 tax year, £39,206 can be paid to shareholders and provided that they
have no other sources of income, no further tax will be payable.
Savings are also possible for shareholders who receive dividend payments in excess of the basic rate band. Their
effective rates of tax on this form of income are 25% for higher rate tax payers, or 30.6% for top rate taxpayers. This
is opposed to 40% or 45% income tax, plus National Insurance Contributions on higher salaries.
Appendix 1 of this letter contains a breakdown of the total corporation tax and income tax payable on company profits
of £50,000 and £100,000 in tax year 2015/16, where shareholders are paid using the low salary/dividend extraction
method.
What is changing?
With effect from 6 April 2016, dividends received up to the basic rate band limit will carry a 7.5% tax charge. Higher
rate dividends will remain taxable at 32.5% but a new 38.1% rate will apply to top rate taxpayers.
Tax will be payable on the amount of dividends received, with no ‘grossing up’ calculation required. Conversely there
will be no tax credit to deduct from the overall tax payable. The tax credit will be replaced with a new allowance, which
will apply to the first £5,000 of dividends received, per shareholder. This allowance will be available in addition to the
personal allowance, meaning that from 6 April 2016 it will be possible to receive up to £16,000 in salary and dividends
from a company before any income tax will become payable.
However, beyond this amount, the new rate of 7.5% will become applicable. Using a typical scenario of extraction by
way of low salary combined with dividends received up to the basic rate band limit, (£43,000 for 2016/17), income tax
of £2,025 will become payable where historically this would be nil.
The new regime will also affect the amount of tax payable for higher and top rate taxpayers. Appendix 2 contains a
breakdown the corporation tax and income tax payable in respect of net company profits of £50,000 and £100,000,
using the low salary/dividend extraction method, with effect from 6 April 2016.
Salary v dividends comparison
Appendix 3 sets out a comparison of the overall taxation payable by a company earning profits of £100,000 in
2016/17. Appendix 4 shows what this comparison equates to for 2015/16. As you can see, a combination of a small
salary plus dividends still remains the most tax effective extraction method.
What are the next steps?
Any shareholder/director of a company will need to review their remuneration and extraction policies.
In addition, it may be worthwhile, where possible to bring forward the declaration of dividends during the current tax
year whilst the lower rates are still applicable. Even if the physical cash is not taken by the end of the current tax
year, once declared the dividend will provide the director/shareholder with a credit in the company accounts. The
cash can then be drawn later with no further tax becoming payable.
Finally, it is worth noting that over the coming tax years, the effect of this change will be mitigated somewhat. It is
proposed that the corporation tax rate will drop again to 19% from 1 April 2017 with a further reduction to 18%
scheduled to take effect from 1 April 2020.
Should you have any queries regarding the above, please do not hesitate to contact me.
Kind regards.
Yours sincerely
ANDY WILLIAMS
ENCLOSURES:
APPENDICES
Appendix 1
Illustrative tax calculations
Tax year 2015/16
£
£
Profits before shareholder remuneration/dividends
50,000
100,000
Less: director's salary
Less: employer's NIC thereon
(8,000)
0
(8,000)
0
Company profits before tax
Corporation tax at 20%
42,000
(8,400)
92,000
(18,400)
Profits available for dividends
33,600
73,600
8,000
37,333
8,000
81,778
(10,600)
(10,600)
34,733
79,178
Director's personal tax position:
Salary
Gross dividends
Personal allowance
Taxable income
At 20% basic rate
At 10% dividend rate
At 32.5% dividend rate
Less: dividend tax credit
Tax payable
0
31,785
2,948
0
3,178.50
958.21
0
31,785
47,393
0
3,178.50
15,402.65
4,136.71
(3,473.30)
18,581.15
(7,917.80)
663.41
10,663.35
Appendix 2
Illustrative tax calculations
Tax year 2016/17
£
£
Profits before shareholder remuneration/dividends
Less: director's salary
Less: employer's NIC thereon
50,000
(8,000)
0
100,000
(8,000)
0
Company profits before tax
Corporation tax at 20%
42,000
(8,400)
92,000
(18,400)
Profits available for dividends
33,600
73,600
8,000
33,600
8,000
73,600
(11,000)
(11,000)
30,600
70,600
Director's personal tax position:
Salary
Gross dividends
Personal allowance
Taxable income
At 20% basic rate
£5,000 dividend allowance
At 7.5% dividend rate
At 32.5% dividend rate
Tax payable
0
5,000
25,600
0
0.00
0.00
1,920.00
0.00
1,920.00
0
5,000
27,000
38,600
0.00
0.00
2,025.00
12,545.00
14,570.00
Appendix 3
2016-17
Salary only; no dividends
Dividend with small salary
Variables
Profit in company av ailable for remuneration
100,000
100,000
Salary /bonus
(88,857)
(8,112)
Employ er's NIC
(11,143)
0
Income Tax rates and allow ances
Personal allow ance
Company 's profits subject to corporation tax
0
91,888
Corporation tax
0
(18,378)
Profits av ailable to distribute as div idend
0
2016-17
Income limit for Personal Allow ance
11,000
100,000
basic rate threshold ("BRT")
32,000
basic rate
20.00%
higher rate threshold ("HRT")
150,000
higher rate
40.00%
additional rate
45.00%
73,510
Tax on UK div idends
Income tax and NIC thereon:
Salary
Div idend
88,857
8,112
Div idend allow ance
5,000
Div idend income at or below BRT
7.50%
0
73,510
(11,000)
(11,000)
Tax able income
77,857
70,622
20% basic rate
32,000
6,400
0
0
small CT rate (Small Profits Rate*)
20.00%
40% higher rate
45,857
18,343
0
0
full CT rate (from 1 April)
20.00%
27,000
2,025
second marginal CT rate
20.00%
0
38,622
12,552
small companies band (Marginal Relief Low er Limit)
N/A
24,743
65,622
14,577
second marginal band (Marginal Relief Upper Limit)
N/A
Less personal allow ance
Div idend income betw een BRT and £150k
32.50%
Div idend income ov er £150k
38.10%
Corporation Tax rates
7.5% div idend rate
32.5% div idend rate
0
Employee's NIC:
"Projected" Marginal Rate CT Pay able
12% on earnings betw een upper and low er limits
2% on earnings abov e upper limit
4,118
0
"Projected" Profit liable to CT
930
0
"Projected" CT Pay able
60,000
"Projected" Effectiv e Rate
20.00%
5,048
Total tax and NIC liabilities
National Insurance Contributions
Employ er's NIC
Corporation tax
PAYE
Employ ee's NIC
11,143
0
0
18,378
24,743
0
class 1 primary (Employ ees' primary Class 1 rate betw een primary threshold and upper earnings limit)12.00%
class 1 secondary (Employ ers' secondary Class 1 rate abov e secondary threshold)
class 1 low er limit (Primary threshold)
5,048
class 1 low er limit (Secondary threshold)
Higher rate tax on div idend
14,577
40,934
32,955
Cash in hand:
Salary
88,857
8,112
Div idend
PAYE
300,000
73,510
(24,743)
Employ ee's NIC
0
(5,048)
Higher rate tax on div idend
(14,577)
59,066
"C"
67,045
"E"
"Benefit" Dividend over Salary remuneration model ( "E" - "C" above):
7,979
13.80%
8,060
8,112
class 1 upper limit (Upper earnings limit, primary Class 1)
42,380
class 1 upper rate (Employ ees' primary Class 1 rate abov e upper earnings limit)
2.00%
2015-16
Appendix 4
Salary only; no dividends
Dividend with small salary
Variables
Profit in company av ailable for remuneration
100,000
100,000
Salary /bonus
(88,857)
(8,112)
Employ er's NIC
(11,143)
0
Income Tax rates and allow ances
Personal allow ance
Company 's profits subject to corporation tax
0
91,888
Corporation tax
0
(18,378)
Profits av ailable to distribute as div idend
0
2015-16
Income limit for Personal Allow ance
10,600
100,000
basic rate threshold ("BRT")
31,865
basic rate
20.00%
higher rate threshold ("HRT")
150,000
higher rate
40.00%
additional rate
45.00%
73,510
Tax on UK div idends
Income tax and NIC thereon:
Salary
Div idend (£73,510 x (100/90))
Div idend allow ance
88,857
8,112
0
Div idend income at or below BRT
10.00%
Div idend income betw een BRT and £150k
32.50%
Div idend income ov er £150k
37.50%
0
81,678
(10,600)
(10,600)
Tax able income
78,257
79,190
20% basic rate
31,865
6,373
0
0
small CT rate (Small Profits Rate*)
20.00%
40% higher rate
46,392
18,557
0
0
full CT rate (from 1 April)
20.00%
31,865
3,187
second marginal CT rate
20.00%
0
47,325
15,381
small companies band (Marginal Relief Low er Limit)
N/A
24,930
79,190
18,567
second marginal band (Marginal Relief Upper Limit)
N/A
Less personal allow ance
Corporation Tax rates
10% div idend rate
32.5% div idend rate
0
Employee's NIC:
"Projected" Marginal Rate CT Pay able
12% on earnings betw een upper and low er limits
2% on earnings abov e upper limit
4,118
0
"Projected" Profit liable to CT
930
0
"Projected" CT Pay able
60,000
"Projected" Effectiv e Rate
20.00%
5,048
Total tax and NIC liabilities
National Insurance Contributions
Employ er's NIC
Corporation tax
PAYE
Employ ee's NIC
11,143
0
0
18,378
24,930
0
class 1 primary (Employ ees' primary Class 1 rate betw een primary threshold and upper earnings limit)12.00%
class 1 secondary (Employ ers' secondary Class 1 rate abov e secondary threshold)
class 1 low er limit (Primary threshold)
5,048
class 1 low er limit (Secondary threshold)
Higher rate tax on div idend
18,567
Less tax credit
7,919
41,121
29,026
Cash in hand:
Salary
88,857
8,112
Div idend
PAYE
300,000
73,510
(24,930)
Employ ee's NIC
0
(5,048)
Higher rate tax on div idend (less tax credit)
(10,648)
58,879
"C"
70,974
"E"
"Benefit" Dividend over Salary remuneration model ( "E" - "C" above):
12,095
13.80%
8,060
8,112
class 1 upper limit (Upper earnings limit, primary Class 1)
42,380
class 1 upper rate (Employ ees' primary Class 1 rate abov e upper earnings limit)
2.00%