LIMITED COMPANY DIRECTORS AND SHAREHOLDERS TAKE NOTE: IMPORTANT CHANGES TO TAX ON DIVIDENDS TAX YEAR 1617
Brace yourselves – not the most dynamic of subject matter. Indeed two subjects most people dread to think about Dividends and Tax. Never-the-less there is an important change for the current Tax Year 1617.
We’ll give you a quick overview with the main change you need to know about with some worked examples.
This will affect anyone who receives dividends, and in particular the SME Directors among you.
DIVIDENDS – A RECAP IN LAYMANS TERMS
Dividends are one of three ways to receive payments if you are a director/shareholder of a Limited Company (the other two being via a Salary or a Director’s Loan).
- A dividend is a payment a company can make to shareholders if it has made enough profit.
- You can’t count dividends as business costs when you work out your Corporation Tax.
- Your company mustn’t pay out more in dividends than its available profits from current and previous financial years.
- To pay a dividend, you must: hold a directors’ meeting to ‘declare’ the dividend, keep minutes of the meeting, even if you’re the only director.
- Dividend paperwork: for each dividend payment the company makes, you must write up a dividend voucher showing the: date, company name, names of the shareholders being paid a dividend, amount of the dividend, you must give a copy of the voucher to recipients of the dividend and keep a copy for your company’s records.
- Tax on dividends: your Company doesn’t need to pay tax on dividend payments. But shareholders may have to pay Income Tax if they’re over £5,000.
CHANGES TO THE TAX ON DIVIDENDS from April 2016
From April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance.
For the Tax Year starting from 6 April 2016, you won’t pay tax on the first £5,000 of dividends that you get in the tax year, no matter what non-dividend income you have. The Allowance is available to anyone who has dividend income.
Above this allowance the tax you pay depends on which Income Tax band you’re in. Add your income from dividends to your other taxable income when working this out. You may pay tax at more than one rate. Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends. The Dividend Allowance will not reduce your total income for tax purposes.
Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an Individual Savings Account (ISA), will continue to be tax free.
The rates of Dividend Tax are also changing according to the Income Tax Band:
Basic rate: 7.5% | Higher rate : 32.5% | Additional rate: 38.1%
Dividends that fall within your Personal Allowance do not count towards the £5,000 dividend allowance.
Personal Allowance: £11,000 | Basic Rate Limit: £32,000 | Higher Rate Threshold: £43,000
How you pay tax on dividends – depends on the amount of dividend income you got in the tax year.
Less than £5,000: You don’t need to do anything or pay any tax.
Between £5,000 and £10,000: You can either put it on your Self-Assessment tax return, if you already fill one in; Or if you are earning via PAYE scheme ask HMRC to change your tax code to have it deducted from your wages or pension.
Over £10,000: You’ll need to fill in a Self-Assessment tax return.
If you don’t usually send a Self-Assessment tax return, you need to register with HMRC by 5 October following the tax year you had the income.
The way the allowance will work in different situations is demonstrated in the examples below (as provided by HMRC website):
Example 1: “I receive less than £5,000 per year in dividends”
From April 2016 you won’t have to pay tax on your dividend income as it’s within the new Dividend Allowance.
Example 2: “I receive dividends of £600 from shares invested in an ISA”
As is the case now, no tax is due on dividend income within an ISA, whatever rate of tax you pay.
Example 3: “I have a non-dividend income of £6,500, and a dividend income of £12,000 from shares outside of an ISA”
With a Personal Allowance of £11,000, £4,500 of the dividends are under the threshold for tax. A further £5,000 comes within the Dividend Allowance, leaving tax to pay at Basic Rate (7.5%) on £2,500.
Example 4: “I have a non-dividend income of £20,000, and receive dividends of £6,000 outside of an ISA”
You won’t need to pay tax on the first £5,000 of dividends due to the Dividend Allowance, but will pay tax on £1,000 of dividends at 7.5%.
Example 5: “I have a non-dividend income of £18,000, and receive dividends of £22,000 outside of an ISA”
Of the £18,000 non-dividend income: £11,000 is covered by the Personal Allowance, the remaining £7,000 to be taxed at Basic Rate.
Of the £22,000 dividend income: The Dividend Allowance covers the first £5,000, the remaining £17,000 of dividends to be taxed at the Basic Rate (7.5%)
Example 6: “I have a non-dividend income of £40,000, and receive dividends of £9,000 outside of an ISA”
Of the £40,000 non-dividend income, £11,000 is covered by the Personal Allowance, leaving £29,000 to be taxed at basic rate.
This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. The Dividend Allowance covers this £3,000 first, leaving £2,000 of Allowance to use in the higher rate band. All of this £5,000 dividend income is therefore covered by the Allowance and is not subject to tax.
The remaining £4,000 of dividends are all taxed at higher rate (32.5%).
Pinnacle are here to help, if you would like assistance with understanding the changes to the Dividend Tax or Self-Assessment in general.
We can also help collate and report your annual returns of information to HMRC and Companies House. Remember fines and penalties are imposed for late returns, late payments and mis-information provided.
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