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Dividend Tax Changes 2016

Posted 21 Feb 16

One of the major changes announced in the second 2015 Budget was a complete restoration of the dividend taxation system from April 2016.

Unfortunately, the overhaul also means higher taxes for limited company shareholders. The current rates for dividend tax will be replaced with the new ones, together with a single £5,000 allowance.

What will change in dividend tax rules for 2016/17?

In the current system, all net dividends are grossed up by 100/90 before they are taxed. It means the nominal 10% tax credit is applied to compensate for the corporation tax your company is already paying from its profits.

We recognise three dividend tax rates now - 10%, 32.5% and 37.5%, which work in relevance to the basic, higher and additional tax rates. Once the tax credit is taken into account, the effective tax rates are 0%, 25% and 30.56% respectively.

According to 2015 Budget, the main difference in the new dividend tax rules for 2016/17 is the way in which your dividends will be calculated. From April, you will be given a new £5,000 tax-free dividend allowance on top of the £11,000 personal allowance.

The new tax rates will be 7.5% for the basic rate, 32.5% for higher rate, and 38.1% for additional rate.

The new rules are set to prevent any fraudulent behaviours from small business owners, as well as, to counteract the ‘tax planning’ opportunities used by limited company owners, who tend to pay themselves small salaries while taxing the large amounts of their income in the form of dividends, with no National Insurance liabilities.

How much more tax will I pay?

From April 2016, you will be able to earn £11,000 tax-free personal allowance plus an additional £32,000 (basic rate band).

It has been confirmed that the £5,000 dividend allowance is really a zero rate dividend tax band within the Basic Rate Income Tax band. The politics governing these decisions seem to be targeting small business owners, especially family-owned companies, where the shares of a company are split between the family members.

What Can I Do?

There are ways in which you can minimise the negative impact the new changes might have on your business. The simplest and quickest solution is to contact a certified and professional accountant, like Tawanda Accountants, who will plan the best financial strategy for your business, analyse your costs and expenses and shed some light on the tax benefits you might be eligible for. Once you discussed your situation with your accountant, you will be able to manage your company’s finances better and in result, avoid any financial loses and confusions. Contact us today to find out how we can help you create a successful future for your business.