The current dividend tax
credit system is a bit confusing and works as follows:
You want to pay a dividend of £900. Divide £900 by 9, which gives you a dividend tax credit of £100. Pay £900 to the shareholder – but add the £100 tax credit
and record a total of £1,000 on the dividend voucher. The dividend is then shown gross on the tax return and then the 10% tax credit is deducted rates of tax are then applied as noted below.
Dividend tax rates before April 2016
| Tax band | Effective dividend tax rate |
|---|
| Basic rate (20%) (and non-taxpayers) | 0% |
| Higher rate (40%) | 25% |
| Additional rate (45%) | 30.56% |
|
|
This will change from April 2016, see the table below
Dividend tax rates after
April 2016
| Tax band | Effective dividend tax rate |
|---|
| Tax Free £5,000 | 0% |
| Basic Rate Tax Payers (20%) | 7.5% |
| Higher Rate Tax Payers (40%) | 32.5% |
| Additional Rate Tax Payers (45%) | 38.1% |
But be warned!
While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result
of receiving significant dividends through a closed company – will pay more.
These changes will also start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities.
This will also reduce the cost to the Exchequer of future tax motivated incorporation (TMI) by £500 million a year from 2019‑20. And remember he also reduced the befit of TMI last December by taking away Entrepreneurs' Relief from goodwill on incorporation.
The Chancellor believes that the tax system will continue to encourage entrepreneurship and investment, including through lower rates of Corporation Tax, but it is likely that this 'tinkering' with the system has more to do with politics than economics.
A full version of the budget with tables is available here. I don't recommend you read it all, unless you are having difficulty sleeping, but the Executive Summary is worth reading.(HM Treasury Summer Budget 2015).
If you need any help deciding whether incorporation is worthwhile for your business or whether paying dividends is
preferable to taking salary and bonuses please contact me on 01244 660866 or book a call at www.calendly.com/noelguilford
Noel Guilford
