Dividends have always been tricky for people to understand, and in recent years there have been some changes that have made them just a little bit harder!
From April 2016 there were some changes that all small business owners need to be aware of.
Prior to April 2016, many small business took a combination of a small salary and a monthly dividend to make up their income. This ensured that they were classed as having paid national insurance for the year, and kept personal tax bills to a minimum. This had been the same for many years, but then it all changed!
From April 2016:-
- the notional 10% tax credit on dividends was abolished
- a £5,000 tax free dividend allowance was introduced
- dividends above this level are now taxed at 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate)
- dividend income is treated as the top slice of income
- individuals who are basic rate tax payers and receive dividends of more than £5,001 will need to complete self-assessment tax returns
You may be asking why the government introduced the changes. Well, it is to combat the tax planning we have all been diligently following for years for small businesses.
So How Does It Work In Reality?
HMRC have produced a factsheet which you can find on their website.
Basically, if you take the basic salary and full dividend each year, then you will get a tax bill personally, which you didn’t have to pay previously. This will be in the region of £2,000.
The more dividends you receive the more tax you end up paying.
If you are baffled by dividend tax rules and would like to chat through your options then feel free to CONTACT US for our consultation options.