Posts Tagged ‘Dividend’

Dividend tax set-back

Thursday, April 6th, 2017

The final matter we want to showcase for this month is the proposed reduction in the dividend allowance from April 2018. At present, shareholders with dividend income below £5,000 will pay no Income Tax on their dividend income. From April 2018, Mr Hammond looks set to reduce this to £2,000.

The average dividend yield for FTSE 100 shares is anticipated to fall to 3%. Based on this rate of return, investors would need a portfolio amounting to some £167,000 to create an annual dividend income of £5,000. From April 2018, only £67,000 would create tax-free income if the allowance drops to £2,000.

Affected investors should therefore consider other tax advantages options, including ISAs. From April 2017 the ISA limit is creased to £20,000.

Shareholders of non-listed private companies will face a tax increase due to this change. The present advantage posed by the low salary high dividend approach to profit extraction will still apply, but the overall Income Tax due will increase from April 2018.

Combined with changes to the taxation of benefits in kind, shareholder directors of smaller companies would be advised to revisit tax planning options for 2018-19.

Dividend tax reminder

Tuesday, October 18th, 2016

From 6 April 2016, any dividends you receive up to £5,000 are tax-free. Dividends received in excess of this amount will be taxed as follows. If they form part of your:

·         Basic rate tax band – taxed at 7.5%

·         Higher rate tax band – taxed at 32.5%

·         Additional rate – taxed at 38.1%

Last year, up to 5 April 2016, dividends received that fell into your basic rate tax band were covered by a tax credit. Accordingly, tax payers with dividend income in excess of the new £5,000 limit will be paying more tax on their dividend income 2016-17.

Readers should also note that for 2016-17:

·         Dividends that fall within your personal tax allowance do not count towards the £5,000 dividend allowance.

·         If your dividends fall under the £5,000 allowance, there is no need to tell HMRC unless you are registered for self-assessment.

·         If your dividends received are between £5,000 and £10,000 you should tell HMRC by ringing their helpline, ask them to adjust your tax code, or enter the details on your tax return if you are required to file.

·         If your dividends are over £10,000 you should be registered for self-assessment. For the tax year 2016-17, you have until 5 October 2017 to register with HMRC.

There are still advantages to maintaining a high dividend, lower salary strategy if you are a director/shareholder of a small limited company. However, it is worth revisiting the calculations on an annual basis to ensure you are optimising the various allowances available.

Dividend tax increase from 6 April 2016

Wednesday, March 16th, 2016

One issue that the director shareholders of small companies will need to get to grips with from April 2016 is the radical change to the taxation of dividends.

Up to 5 April 2016, dividends are paid after the deduction of a deemed income tax credit of 10%. So, as long as your dividends are taxed as part of your basic rate band, no further income tax falls to be payable.

From 6 April 2016, the first £5,000 of dividend income will be free of tax regardless of the income tax band that the dividends fall to be taxed within. From the same date the 10% income tax credit is abolished.

Dividends in excess of the £5,000 exemption, that fall to be taxed as part of the basic rate band will suffer a tax charge of 7.5%. For all basic rate income tax payers this will therefore be an additional tax charge.

If your dividends fall to be taxed as part of your higher rate or additional rate bands for income tax purposes, the dividend tax charge is significantly higher: 32.5% (higher rate) and 38.1% (additional rate).

For shareholders of small companies that have opted for the classic low salary high dividend approach, it is likely, therefore, that they will see a decrease in their take home pay as a result of these changes.

The case for incorporation of a business, as opposed to the self employed alternative, is still compelling even with the introduction of the new dividend tax charges. However, when we see the complete draft of the 2016 finance bill next week, opportunities for fine tuning the tax planning for small company shareholders may become apparent. Watch this space…

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