Dividends – A complete overhaul

The Summer Budget included the announcement of a complete overhaul of the dividend tax system.  We would like to confirm that the new regime is not being brought in until April 2016 so there is no need to alter your remuneration strategy now and the detailed draft legislation has not yet been released, so we are relying on the Budget announcements and HMRC guidance.

 

From April 2016 the dividend tax credit will be abolished and all individuals will be able to receive £5,000 dividend income tax free under the new Dividend Tax Allowance. The tax rates on dividends in excess of this nil rate band will be 7.5% for basic rate tax payers, 32.5% for higher rate taxpayers and 38.1% for additional rate tax payers. Dividends will continue to be tax free in ISAs and pensions. 

 

The most important thing to note is that dividends may still be cheaper from a tax perspective than paying a large salary.

 

Our tax team ran some calculations based on common remuneration planning strategies such as paying dividends to the basic rate band limit, keeping income below £100,000 etc. and quantified the difference between the current system and the new tax rates.  The table below shows the additional tax cost incurred to maintain a shareholder’s net cash position under their current remuneration strategy.

 

Strategy

Additional tax cost

   

Dividends to basic rate band

£1,907

Dividend to £100k

£7,023

Dividend to £150k

£12,746

   

Per every additional £10k

£1,218

 

 

So, for example, for a shareholder who currently draws dividends up to the basic rate band limit to continue having the same level of net cash it will cost additional tax of £1,907 compared to the current position.

 

www.hazlewoods.co.uk


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