Prior to April 2016, providing your total income fell below the higher rate tax threshold there would be no income tax to pay on any dividends, but this changed with the introduction of the dividend tax.
A summary of the changes
There have been two recent changes in the taxation of dividends, the first of which is already in force, with the second being introduced from April 2018.
In 2015, the Government introduced significant changes to the way in which dividends were to be taxed. The changes introduced a new tax on dividends resulting in only the first £5,000 of dividends being tax free with all other dividends up to the higher rate threshold being taxed at 7.5%. Dividends above the higher rate threshold would be taxed at 32.5%.
These rates of tax apply to the tax year just ended on 5th April 2017 and the tax year ending 5th April 2018.
The recent budget proposed a reduction in the tax-free dividend allowance from £5,000 to £2,000 with effect from 6th April 2018. Tax rates on the dividends remain at 7.5% or 32.5% above the higher rate threshold.
Are Limited Companies still a tax effective way to run a small business?
Whilst these new rules mean that the level of financial benefit gained by operating as a Limited Company verses being Self Employed will be reduced, in the majority of cases the financial benefits will still outweigh the negatives – not least as the business owner will not be paying as much in National Insurance (currently at 9%). The financial benefits are small though where company profits are lower, and those who are currently self-employed and have profits of less than around £40,000 may find the extra admin involved (particularly if they are not using an accountant) outweighs the benefit.
So, what next?
The main thing you need to do is to make sure that you have considered your own specific circumstances and plan for additional tax liabilities and of course plan for ways to minimize your overall tax exposure.
If you’d like to know how we can help you with this, or with anything else, feel free to call us on 01942 734455 or email me at firstname.lastname@example.org