Major change in dividends from 6 April 2016

Many company Directors take dividends from their companies as this is a tax efficient way of remunerating yourself alongside a salary.

Up until 5 April this year, if you pay only basic rate tax, there is no additional tax to pay on dividends falling within this range (commonly known as the 10% credit or relief) as the tax is considered to be deducted at source thus you receive the dividend net.

However, from 6 April 2016 the rules are changing.  Every individual is entitled to £5,000 of dividends tax free and from £5,001 to the higher rate tax threshold will be taxed at 7.5%.  Note that this means you now receive the dividend gross.

Example (for a basic rate tax payer)

To 5 April 2016                     You received a dividend of £13,500

This dividend is received net with the 10% tax already deducted.  The actual dividend is £15,000 which is entered onto the tax return.  The tax deducted of £1,500 is treated as tax already paid so there is no additional tax to pay.

From 6 April 2016                You receive the same dividend of £13,500

This dividend is received gross.  Assuming there are no other dividend income, the first £5,000 is exempt from taxation meaning £8,500 is liable at 7.5% giving a self assessment tax bill of £637.50.

                                   

Remember!!

• If your dividend income is over the £5,000 exemption, you will have a tax bill so keep money aside to pay HMRC.
  
• If you don't already, you will need complete a self assessment tax return in order to pay the tax to HMRC