Summer Budget: Dividend tax reforms and small companies

My wife and I run our own company. We take a small salary and the rest of our money out as dividends. We’ve been hearing rumblings about some changes that were in the Summer Budget regarding how dividends are taxed. Will they affect us?  

1st August 2015

Thanks to the effect of a notional 10 per cent tax credit, the “effective” tax rates on dividend income is 0 per cent in the basic rate band, 25 per cent at the higher rate and 30.56 per cent in the additional rate band.

But under proposals announced in the Summer Budget, from April 2016 dividend income over £5,000 a year will be liable for tax at the basic rate of 7.5 per cent, 32.5 per cent for the higher rate and 38.1 per cent for the additional rate.

I assume virtually all of your income is from the company and is all taxed within the basic rate band.

At this stage, the proposed changes have not been legislated and there is still very little detail surrounding how the dividend allowance will be operated.

But based on some assumptions, it looks like if you were to continue with your remuneration package as it is, it might cost you in the region of £1,700 each in personal tax under the proposed regime. Under the current system, you’ve probably not been paying any personal tax because it’s covered by the tax credit so you will need to factor this in to your budgets and make sure you put aside enough to cover it. Operating as a limited company should still be more tax efficient for you, but it won’t offer quite the same tax savings it used to.

If you’d like to discuss your affairs in more detail, please feel free to contact us and we’ll put you in touch with your local TaxAssist Accountants office. 

By Jo Nockels

Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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