For many years dividends have come with a 10% tax credit which means that there’s no additional personal tax to pay on dividends received by basic rate taxpayers – the basic rate of tax on dividends is currently 10%. However, the Summer Budget has announced that, from 6 April 2016, this tax credit will disappear and be replaced with a tax-free dividend income allowance of £5,000. Any dividends received above this will be taxed at 7.5% (up from the current effective rate of 0%) for basic rate taxpayers, 32.5% (up from the current effective rate of 25%) for higher rate taxpayers and 38.1% (up from the current effective rate of 30.1%) for higher rate taxpayers.
You have annual profits after corporation tax of £30,000. Your advice for 2015/16 was for them to take an annual salary of £10,600 to cover their personal allowance with the remaining £19,400 as dividends. Under the current rules you have no personal tax to pay. Under the new rules, from April 2016, you will suddenly have a personal tax bill to pay of £1,080 ((£19,400 – £5,000) x 7.5%) – quite a shock for many clients!
Remuneration planning has become a lot more complex, especially with the withdrawal of the employment allowance for some, and the restriction on buy to let mortgage interest relief. Take advice before these new changes come into effect as it may be better to accelerate dividend payments.