A strange thing I have just noticed about the new dividend tax…

September 5, 2015

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!

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