It is not unusual for company owners to extract funds, either in part or otherwise solely through dividends, from their owner-managed businesses. These may or may not be taken alongside a salary.
This previously tax-efficient approach to remuneration has, for a while now, had HMRC thinking about how it could restore the balance.
The dividend allowance was introduced back in April 2016, as part of a fundamental change to the way in which dividends were taxed.
The 10 per cent dividend tax credit was removed and instead the first £5,000 of dividends became tax exempt for individuals. Meanwhile, the rate at which dividends were taxed was also reviewed.
The new rates changed from 10 per cent, 32.5 per cent and 37.5 per cent, to 7.5 per cent, 32.5 per cent and 38.1 per cent for dividends exceeding the allowance in the basic, higher and additional rate taxpayer bands.
As of 6 April 2018, however, the dividend allowance has been cut dramatically from £5,000 to £2,000. Despite the allowance being reduced, the tax rates as outlined above have not changed.
The measure, introduced in the 2017 Autumn Budget, is intended to level the playing field between the self-employed, directors, shareholders and employees – but, if you’re not careful, you could get left behind.
In his speech at the time, the Chancellor said: “People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment.”
From April 2018, the amount you can earn without needing to pay tax, if you had no other income, would be £13,850 in a combination of salary and dividends.
In real terms, the cut could cost directors anywhere between £225 to £1,143 a year, depending on which tax bracket they fall into. In addition, more taxpayers may fall into self-assessment because of the reduction.
It is important that those affected by the reduction consider its impact and what they may need to do now, or at least in the early part of this new financial year, to avoid losing out.
We would recommend that you review how you currently extract income from your company and whether this will continue to work for you given the changes to the rules.
This could become complicated if you receive income from multiple sources, for example, shares and savings, so it is always best to seek professional advice at the earliest opportunity.
Tax rules are changeable and how they affect you depends on your individual circumstances which, likewise, aren’t always fixed. As with any tax, careful planning and a thorough review of your position can help to mitigate the impact of any changes.
If you’d like to find out more about how we can help you to minimise your liabilities and maximise your savings – contact us today.