From 6th April, only the first £5,000 of dividends withdrawn will be considered tax-free and the rest will be taxable.
This is a big change compared to previous tax years when a director could receive dividends as a basic rate taxpayer, and effectively pay no personal income tax.
How it's calculated under the new rules
You are entitled to a personal allowance of £11,000 a year from April 2016. For example, if you were to take £8,060 in salary, then youll be able to take up to £2,940 in dividends without incurring tax on top of the £5,000 tax-free.
You wont pay personal income tax on a salary of up to £8,060 and dividends up to £7,940 (£2,940 plus the £5,000 tax-free dividend allowance). Following on from this, youll be taxed at the rate of 7.5% on the next £27,000 worth of dividends. Up to this point youll pay £2,025 in personal income tax.
After your total dividends are above £34,940 (£27,000 plus £7,940) you will incur the higher rate dividend tax of 32.5%. Because of these changes, its important that you utilize any allowances for the 15/16 tax year before 5th April. However this will vary if you have any additional income.
If youre going to take £40,000 in dividends for the next tax year (whichll put you £5,060 into the higher rate category), then you would incur £1,644.50 in personal income tax. This assumes your total accumulated salary is £8,060.
For Additional Rate taxpayers (those earning over £150,000), dividends are taxed at 38.1%.
Basic rate example.
|
Salary |
8,060.00 |
|
|
Dividends |
27,952.00 |
|
|
Total income |
36,012.00 |
|
|
Personal allowance |
11,000.00 |
|
|
Taxable income |
25,012.00 |
|
|
Dividends @ 0% |
5,000.00 |
0.00 |
|
Dividends @ 7.5% |
20,012.00 |
1,500.90 |
|
Income tax due |
1,500.90 |
Additional rate example
|
Salary |
8,060.00 |
|
|
Dividends |
51,952.00 |
|
|
Total income |
60,012.00 |
|
|
Personal allowance |
11,000.00 |
|
|
Taxable income |
49,012.00 |
|
|
Dividends @ 0% |
5,000.00 |
0.00 |
|
Dividends @ 7.5% |
27,000.00 |
2,025.00 |
|
Dividends @ 32.5% |
17,012.00 |
5,528.90 |
|
Income tax due |
7,553.90 |
Note: these examples are dependant on taking a salary up to the National Insurance Threshold (£8,060 - which is exactly the as same the 2015/16 tax year). If you take more than this and want more information about planning personal tax liabilities,