For many years now we have had a ‘notional tax credit’ on dividends.
If you’ve never heard of it or don’t understand it, don’t worry – I’ve met accountants who don’t understand it.
Essentially, if you take out £30,000 of cash out of your limited company and call it dividends, when these dividends are recorded on your personal tax return, they mysteriously increase by 11.11111%.
So take out £30,000 but your tax return says £33,333. I have had many conversations with clients trying to explain this ‘notional tax credit’ but it usually ends with the client saying that it doesn’t make sense to which I have to agree – it does make no sense.
Our friend George agreed as well and from 6 April 2016, he is abolishing it. £30,000 taking out in cash dividends will mean £30,000 on your tax return.
One slight downside of this is that when applying for a mortgage, the mortgage provider will look at your personal income first and depending on the mortgage you need you would often be in a better position to show more income than less. Hence this 11.1111% booster really did help that (the mortgage providers didn’t seem to know what it was either) since you took £30,000 but you officially earned £33,333.
Alas, that advantage has now gone!
