At present there are considerable savings in National Insurance contributions to be made if a minimal amount is paid as salary and any balance of a remuneration package is paid as dividends (particularly for shareholder directors of private limited companies).
From April 2016, the NIC status of dividends is not changing and therefore this strategy is still valid. Unfortunately, the income tax position of dividend income is changing and this may have a direct impact on the overall savings in NIC and income tax that can be achieved.
From 6 April 2016, the way dividends are being taxed will change. The 10% tax credit is being abolished and each individual will have available a flat rate dividend allowance of £5,000. Any dividends received by an individual in excess of £5,000 will be taxed as follows:
- 7.5% if your dividend income is within the standard rate (20%) band
- 32.5% if your dividend income is within the higher rate (40%) band, and
- 38.1% if your dividend income is within the additional rate (45%) band
Without the tax credit, a dividend income of £30,000 received in 2016-17 would create the following, additional income tax liabilities.
Comparison of tax payable on dividend income of £30,000:
|Income tax due if dividend received is £30,000||2015-16||2016-17|
|Dividend is within the standard rate band||Nil||£1,875|
|Dividend is within the higher rate band||£7,500||£8,125|
|Dividend is within the additional rate band||£9,167||£9,525|
Based on these figures:
- if your dividend income is within the standard rate band you would have extra tax to pay for 2016-17 of £1,875;
- if your dividend income is within the higher rate band you would have extra tax to pay for 2016-17 of £625, and
- if your dividend income is within the additional rate band you would have extra tax to pay for 2016-17 of £358.
As you can see, this new tax on dividends will impact standard rate tax payers the most. In all cases any tax liabilities for 2016-17 will be collected 31 January 2018. At the same time, HMRC will also add 50% of the tax liability to your first self assessment payment on account for 2017-18, also due 31 January 2018 with a further 50% due at the end of July 2018.
We advise all readers to take professional advice to see how these changes will affect their personal tax for 2016-17. You will not need to pay addition tax due until 31 January 2018, but there may be planning options that could be employed to lessen the blow.