Changes: Key facts
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From April 2016, notional 10% tax credit on dividends will be abolished.
A £5,000 tax free dividend allowance will be introduced.
Dividends above this level will be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1%
(additional rate)
Dividends received by pensions and ISAs will be unaffected
There is no further information available at this point; however it is likely that dividends will
remain non-deductible for corporation tax purposes.
Impact
The change is aimed to tax small companies who pay a small salary designed to preserve
entitlement to the State Pension, followed by a much larger dividend payment in order to reduce
National Insurance costs.
This measure will have a very harsh affect on those who work with spouses in family companies. A
family could be over £5,000 p.a. worse off.
How does this work?
WARNING: the detail on these measures is as yet not published by HMRC however based on the
information available the new rules may work as follows:
Method 1 example: the dividend allowance is within your basic rate tax band
If you are basic rate taxpayer, and you receive all your income in dividends you will be up to
£2,025 worse off.
The basic rate tax threshold for 2016/17 is £43,000 (personal allowance of £11,000, plus basic
rate tax band of £32,000)
If a dividend of £43,000 is received we assume (at this stage) that is taxable as follows, breaking
it down into the different "slices":
The first £11,000 - covered by your personal allowance
The next £5,000 - covered by your dividend allowance
The next £27,000 - taxed at the new 7.5% = £2,025 tax due.
A higher rate taxpayer will pay tax at 32.5% on any dividend income in excess of the basic rate
threshold, and an upper rate taxpayer will be taxed at the new 38.1% rate.
or
Method 2 example: the dividend allowance extends your basic rate band
If you are basic rate taxpayer, and you receive all your income in dividends you will be up to
£1,650 worse off.
The basic rate tax threshold for 2016/17 is £43,000 (personal allowance of £11,000, plus basic
rate tax band of £32,000), plus you have a £5,000 dividend allowance.
If a dividend of £43,000 is received that is taxable as follows, breaking it down into the different
"slices":
The first £11,000 - covered by your personal allowance
The next £5,000 - covered by your dividend allowance
The next £22,000 - taxed at the new 7.5% = £1,650 tax due.
A higher rate taxpayer will pay tax at 32.5% on any dividend income in excess of the basic rate
threshold, and an upper rate taxpayer will be taxed at the new 38.1% rate.
comparing to what would have happened under the old rules:
Old rules: this shows what would have been payable under the old rules if they were in
place in 2016/17
If you are basic rate taxpayer, and you receive all your income in dividends.
The basic rate tax threshold for 2016/17 is £43,000 (personal allowance of £11,000, plus basic
rate tax band of £32,000).
If a dividend of £43,000 is received that is grossed up to £47,777.77 taxable as follows, breaking
it down into the different "slices":
The first £11,000 - covered by your personal allowance
The next £32,000 - taxed at 10% = £3,200
The next £4,777.77 is taxed at 32.5% = £1,552.77
You receive a tax credit = £(4,777.77)
Tax is paid of £nil (the tax credit is non-repayable under the old rules).
Investors will need to reconsider their portfolios ahead of the changes.
Small business
For small business owners the changes are likely to be extremely unpleasant, as the following
examples, all following the method 1 illustrate.
Method 1 continued examples
Small company examples
Example £50,000 dividend
Assume a sole director company has profits of £70,500 and it then pays its director a salary of
£8,000 (that's to ensure basic NICs benefits) and after corporation tax votes him a dividend of
£50,000 out of the remaining retained profit. What tax is paid under the new rules and how does
that compare to what would have been paid if there had been no changes made to the dividend
regime or to the Employers' NICs allowance?
New rules 2016/17
Tax paid
Company profit before salary and tax £70,500
Salary £8,000
-
Company profit after salary £62,500
12,500
Dividend paid of £50,000, taxed as:
£3,000 - covered by balance of personal allowance £5,000 @ 0%
-
£27,000 @ 7.5%
2,025
£15,000 @ 32.5%
4,875
Total tax payable (new rules)
£19,400
2016/17 as if under the old rules
Comparing old rules for 2016/17
Tax paid
Company profit before salary and tax £70,500
Salary £11,000 (covered by personal allowance) Company profit after salary £59,500
11,900
Dividend paid of £47,600 (£52,888) grossed up)
£32,000 @ 10%
3,200
£20,888 @ 32.5%
6,788
Less tax credit
(5,288)
Total tax payable (old rules)
£16,600
Increased tax payable following the changes for 2016/17 £2,800
Example £40,000 dividend
Assume a sole director company has profits of £58,000 and it then pays its director the most
efficient level of salary and after corporation tax votes him a dividend of £40,000 out of the
remaining retained profit. What tax is paid under the new rules and how does that compare to
what would have been paid if there had been no changes made to the dividend regime?
New rules 2016/17
Tax paid
Company profit before salary and tax £58,000
Salary £8,000 (securing NICs benefits)
-
Company profit after salary £50,000
10,000
Dividend paid of £40,000, taxed as:
£3,000 - covered by balance of personal allowance £5,000 @ 0%
-
£27,000 @ 7.5%
2,025
£5,000 @ 32.5%
1,625
Total tax payable (new rules)
£13,650
2016/17 as if under the old rules
Comparing old rules for 2016/17
Tax paid
Company profit before salary and tax £58,000
Salary £11,000 (covered by personal allowance) Company profit after salary £47,000
9,400
Dividend paid of £37,600 (£41,777 grossed up)
£32,000 @ 10%
3,200
£9,777 @ 32.5%
3,177
Less tax credit
(4,177)
Total tax payable (old rules)
£11,600
Increased tax payable following the changes for 2016/17 £2,050
The cost of this measure will decrease very slightly when corporation tax rates fall in 2017 to 19%,
and to 18% by 2020.
Petition against dividend tax
A petition has apparently been set up against this new tax. It is here. (Noting that no donation is
in fact required to this petition, although it asks for one)
Think now of taking a salary/dividend increase – Above the dividend allowance
(Assuming we use NIC rates for 2015/16 as these are not available yet)
Dividends on say £10,000 2016/17
Basic Rate Higher Rate
Tax
£750
£3250
Corporation tax paid on £10,000 profits
£2000
£2000
Net Funds Retained
£7250
£4750
Salary addition say £10,000 2016/17
Basic Rate Higher Rate
Tax
£2000
£4000
NIC Ees
£1200
£200
NIC Ers
£1380
£1380
(£2276)
(£2276)
£7696
£6696
Corporation Tax Deduction Saving 20%
Net Funds Retained
Think now of taking a loan from your company
This is where the chancellor has in my opinion made a mistake
If you take out a loan from your company and pay the official rate of interest current 3.25% there is
no benefit in kind
The company will have to pay an additional amount of 25% Corporation tax on S455 but this is
refunded when the loan is repaid
Loan £10,000 2016/17
Basic Rate Higher Rate
S455 Tax 25% (Repayable)
£2500
£2500
Interest Paid 3.25%
£325
£325
Corporation Tax 20%
£2000
£2500
Net Funds Retained
£5175
£5175