Company Dividends – What Are The Tax Implications?Written on February 12, 2019 by Kirk Rice LLP
The Question:
I run a small company and for many year’s I have paid myself a salary from the company and periodic company dividends. I am aware that the tax rate on dividends increased a couple of years ago, and I felt the first impact of that when my personal tax bill had to be paid in January 2019. Is it still worth me taking a dividend or shall I draw a higher salary?
Kirk Rice LLP answers:
For many years accountants have been warning that it is only a matter of time before income tax on company dividends would increase. That moment finally came on 6 April 2016 when new rules came into force.
The government introduced a progressive series of company dividend tax rates, shown in the table below, and removed the notional 10% tax credit attached to all UK dividends.
Taxable dividend income * |
Tax rate** |
Comparable rate in 2015-16 |
| Below high rate *** | 7.5% | Nil |
| High rate *** | 32.5% | 25.0% |
| Additional rate *** | 38.1% | 30.6% |
*Total dividend income after £5,000 (2016/2017, 2017/2018) exemption and any available personal allowance. Exemption reduced to £2,000 for 2018/2019.
**Rate applies to the actual dividend received.
*** High rate threshold £37,500 (2019/2020); Additional rate is above £150,000
To soften the blow, a £5,000 tax-free exemption was introduced which is available to all taxpayers, not just owner-managers of companies. This was reduced to £2,000 from 6 April 2018.
Company owner-managers will look at these tax rates with some dismay and like you, would have felt this impact their January 2019 tax payments. For many years now, most owner-managers have pursued a ‘low salary/high dividend’ profit extraction model since this proved to be more tax efficient. The increase in dividend tax will narrow the tax differential between paying salary and dividends so that dividends become only marginally preferred. But there will continue to be a tax benefit in maintaining a ‘low salary/high dividend’ model.
Companies that exploited the ability to pay ‘tax-free’ dividends of around £33,000 – £34,000 to spouses will also have seen such amounts taxed at 7.5% from 2016-17. This should still produce typical tax savings of 25% (ie, 32.5% less 7.5%) of the dividend and hence such planning may still be worthwhile.
If you’re in discussing this topic further, please get in touch via info@kirkrice.co.uk
This article was updated and correct on 10 May 2018.
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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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