How do the New Dividend Rules affect the owner of a small company?

Jan 10, 2016

You will, no doubt, have heard much moaning about the new dividend rules that come in from 6 April 2016 but do you know how they affect you?

 

Many of my clients are owners of micro businesses, operating as a limited company; often on their own, or with their partner as fellow director and shareholder.  They have taken their money out of the company in the most tax efficient way – minimum salary and then a dividend payment up to the basic rate threshold – because that’s what their accountant told them to do!

 

How do the new dividend rules affect them?

 

From 6 April 2016, the notional tax credit attached to dividends is abolished ( dont worry if you never really knew what it was – it kept us accountants crunching numbers and usually meant that you didnt pay any additional personal tax on dividends you took out of your company)

Instead, a £5,000 dividend tax allowance is being introduced.

Any dividend you receive on top of this will be taxed – at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.

So for a typical client of mine this will be the effect:

They will have a salary of £11,000 in 2016/17 (up to the personal allowance) and then dividends of £32,000 (the basic rate threshold)

Instead of paying no personal tax, as they would have done this year, their salary will be covered by their personal allowance; they will receive a £5,000 dividend allowance against their dividends and the remaining £27,000 will be taxed at 7.5%, which is £2,025.

If husband and wife have been drawing salary and dividends in the past, then they will be £4,050 worse off under the rules.

Not surprisingly this is hugely unpopular and over 100,000 have signed the petition against it.  The changes have been introduced to close the gap between the tax regime for those operating through a limited company compared to being self employed – and certainly the tax benefit of incorporating has been reduced.

 

What should you do?

Ensure you pay the maximum dividend you can before 5 April 2016 up the basic rate threshold.

Consider company pension contributions and other tax efficient ways of extracting money from the company.

I will be talking to my clients in the next couple of months to ensure we do all we can to make sure they are as tax efficient as possible in this tax year.

If you would benefit from some further help , then please contact Rosie Forsyth