In the recent budget, the Chancellor announced that from 6 April 2016 there will no longer be a national tax credit associated with dividends received and the following rates will apply after a £5,000 tax free dividend allowance:
Basic rate taxpayers – 7 ½%
Higher rate taxpayers – 32 ½%
Additional rate taxpayers – 38.1%
This will mean that from 2016/17 individuals will be able to receive up to £17,000 tax free:
Personal allowance £11,000
Tax free interest £1,000
Tax free dividends £5,000
IMPACT OF CHANGES TO DIVIDEND TAXATION ON FAMILY COMPANIES
A common strategy that we often advise to family company director/shareholders is that they extract profits from their company by way of dividends instead of paying themselves a salary. This is because there are no national insurance contributions on dividend payments and where the dividend income falls within the basic rate band (up to £42,385 for 2015/16) there is currently no income tax on dividends.
Where both husband and wife are directors and shareholders they will be able to pay themselves a salary of £11,000 each and then dividends of £5,000 each tax free. However the next £27,000 of dividends up to the new £43,000 higher rate threshold would be taxed at 7 ½ % resulting in income tax of £2,025 each being payable for 2016/17. Under the current rules there would be no tax on such dividends up to £42,385.
This is a significant change to the taxation of dividends and clearly makes them less attractive than previously. From April 2016 more consideration may have to be given to the choice between paying salary or dividend to owner managers!!!!
