Chipperfield Accounting Briefing Note
Please find below an update regarding the taxation of dividends to enable you to put the correct amount of tax aside for the current year’s tax bill due on 31 January 2018.
The three elements to the new tax rules from 6 April 2016 are:
A shareholder will have to put higher amounts of tax aside for income tax on dividends. If you take the same amount of dividends in the tax year 2016-17 as 2015-16 then additional tax will fall due. For example, assuming a Director salary of £8,060 and no other income, the total tax to put aside on dividends received is as follows:
Dividend Tax
£10,000 £155
£20,000 £905
£30,000 £1,655
£40,000 £3,670
£50,000 £6,920
£60,000 £10,170
£70,000 £13,420
£80,000 £16,670
£90,000 £19,920
What are the practicalities regarding my tax?
Any additional tax liability will be payable on 31 January 2018 after deducting payments on account already made for 2016-17. Payments on account will also increase for 2017-18.
To recap, payments on account are made twice a year (31 January and 31 July) as a contribution towards your tax bill for the current year with the balance due on 31 January after the tax year.
Since it is likely that payments on account already made will be insufficient this year, it is advisable to set an additional amount aside so that there are no nasty surprises next January.
Potential tax mitigation strategies?
For more information, please call me to discuss but there are a few ways in which to mitigate the additional tax burden such as:
Please find below an update regarding the taxation of dividends to enable you to put the correct amount of tax aside for the current year’s tax bill due on 31 January 2018.
The three elements to the new tax rules from 6 April 2016 are:
- An increase in the effective rate for dividends by 7.5% across all tax bands. The new rates are 7.5% for basic rate tax payers, 32.5% for higher tax payers and 38.1% for an additional rate tax payer.
- The 10% dividend tax credit has been abolished along with the need to “gross up” dividends.
- The introduction of a tax free £5,000 dividend allowance which applies for all tax payers regardless of their income levels. The effect of this allowance is that the first £5,000 of dividends received by each individual are taxed at a rate of 0%, but are still included in the calculation of total taxable income.
A shareholder will have to put higher amounts of tax aside for income tax on dividends. If you take the same amount of dividends in the tax year 2016-17 as 2015-16 then additional tax will fall due. For example, assuming a Director salary of £8,060 and no other income, the total tax to put aside on dividends received is as follows:
Dividend Tax
£10,000 £155
£20,000 £905
£30,000 £1,655
£40,000 £3,670
£50,000 £6,920
£60,000 £10,170
£70,000 £13,420
£80,000 £16,670
£90,000 £19,920
What are the practicalities regarding my tax?
Any additional tax liability will be payable on 31 January 2018 after deducting payments on account already made for 2016-17. Payments on account will also increase for 2017-18.
To recap, payments on account are made twice a year (31 January and 31 July) as a contribution towards your tax bill for the current year with the balance due on 31 January after the tax year.
Since it is likely that payments on account already made will be insufficient this year, it is advisable to set an additional amount aside so that there are no nasty surprises next January.
Potential tax mitigation strategies?
For more information, please call me to discuss but there are a few ways in which to mitigate the additional tax burden such as:
- Making tax efficient pension contributions
- Renting your home office to the company at a market value rent
- Transferring shares to a spouse working in the business to utilise the £5,000 dividend allowance
- Retaining excess profits within the company to realise lower capital gains tax rates on exit