HMRC have now confirmed how they intend to tax dividend income from April 2016, this reveals a surprise not previously mentioned in the July 2015 budget.
First of all, HMRC state that any unused personal allowance can still be offset against dividend income.
However, much to the frustration of accountancy experts, the new £5,000 tax free dividend allowance will not be kept separate from other income and will, instead, sit within the basic or higher rate tax bands.
This means that any dividend taken within the £5,000 allowance will not incur tax, however it will count towards basic or higher rate earnings.
The change will affect all UK company shareholders and it is believed that the new rules will raise £6.8 billion for the Treasury over the course of this Parliament.
What does it mean for contractors who provide services via their own limited companies?
A contractor who has a salary of £8,000 and dividend income of £40,000 during 2016/17 will see their £8,000 salary and first £3,000 of dividend income covered by their personal allowance.
This leaves £37,000 of dividends remaining where the following tax rates will apply:
It is now more crucial than ever for contractors to understand exactly how they pay themselves. We have provided a link to our calculator that will enable contractors to learn how much more tax they may pay under the new rules.
What steps can contractors take to minimise their tax liability?
Although dividend tax bills may marginally increase from April 2016, it does not significantly reduce the financial advantages that contractors currently enjoy.
It is however prudent for contractors to consider how they could limit any future liabilities. Options may include:
- Retain cash within the business to fund company pension contributions
- Retain cash within the business to fund company life cover (i.e. critical illness) premiums
- Retain cash within the business until retirement
- Employing staff within the business
For more information, please call Jim McMeekin or Chris Bloor on 0161 703 2549, who will be pleased to provide further details, facts, figures and options.