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Kirk Rice Blog

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Dividend Tax – Beware Of The Rising Tax BillWritten on August 31, 2017 by Kirk Rice LLP

Dividend Tax –  Beware Of The Rising Tax Bill

A new dividend tax was introduced from April 2016 and it is only now that taxpayers are seeing the tax fallout of the dividends they received during the tax year 2016/17 following the preparation of their tax returns for that year.

Whilst the dividend tax rates are simple to understand, the mechanics of how dividends were taxed prior to 2016/17 was complex and therefore can be difficult to compare to the new rules. Broadly, tax liabilities have increased on dividends by 7.5% and this is taking some by surprise, particularly those that are basic rate taxpayers and have not previously had any personal tax liabilities to pay.

Taking an example:

John runs his own private Limited company. Each year he pays himself a salary of £8,000 and dividends of £30,000.

2015/16

For this tax year John is within the basic rate tax band of income. The personal allowance covers his salary and part of the dividends. There is no further tax to pay on the dividends and John’s liability is therefore nil.

2016/17

For this tax year John’s income continues to be within the basic rate band. However, dividends are now taxed differently with the first £5,000 taxed at 0% and the remainder at 7.5%. The personal allowance covers the salary and £3,000 of the dividends. The next £5000 is tax free which leaves £22,000 to be taxed at 7.5%. This amounts to a tax liability of £1,650.

Given that John has not previously paid personal tax on his dividends, then a £1,650 tax bill is going to come as a surprise, particularly if he has not made provision for it. The bill will be due for payment on 31 January 2018. Unfortunately the bad news does not stop there. There will also be a requirement for John to make payments on account for 2017/18 based on his actual liability for 2016/17. The payments on account are due in two instalments on 31 January 2018 and 31 July 2018 and will amount to £825 on each occasion. This means John will have a total tax bill of £2,475 to pay on 31 January 2018!

Salary Vs Dividend

Following the introduction of the dividend tax, I am often asked by owner managed companies, whether it would now be better to draw a larger salary under PAYE rather than dividends. The simple answer is no because the national insurance costs for the individual and the company with a salary are still much greater than the dividend tax.  Dividends are still more tax and National Insurance (NI) efficient, just not as good as they used to be.

2016/17 Tax Returns

Any individual who received dividend income in 2016/17 would be wise to have their tax returns completed as soon as possible, so that liabilities due on 31 January 2018 can be calculated and planned for well in advance of the payment deadline.

To read more about dividend tax read our factsheet or download our Free Key Guide ‘Accessing your company profits’

Personal Tax – Dividends and Interest

 

If you would like more advice regarding dividend tax or any other tax matter, please contact one of our Tax Partners, Graham Jennings  on 01344 875 000 in our Ascot office or James Moody on 0208 789 8588 in our Putney office or email info@kirkrice.co.uk.

If you would like to receive Taxing Times electronically, simply email info@kirkrice.co.uk stating Taxing Times Article in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The FCA does not regulate tax and trust advice.

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