3 Steps That Will Help You Save On The New Dividend Tax
Author: Russell SmithJanuary 11, 2016
Learn everything you need to know about the dividend tax changes from our expert tax accountants in Leeds.
In July 2015, George Osborne made an announcement that baffled many business owners.
Along with a host of other things, he shared with us his plans for dividend tax changes, coming into effect in April 2016.
This announcement is a game-changer for many small business owners. The new rules are being condemned by many, both for their poor execution and potential to hit the pockets of British business owners — and hit them hard.
What Are the New Dividend Tax Changes?
The previous scheme followed a system whereby basic tax-rate payers didn’t have to pay any tax on dividends. However, those who paid into the higher-rate system were charged 25% on dividends, while anything that lapped into the additional tax-rate system was charged at 30.5%.
Now, all taxpayers get a tax-free £5000 allowance. However, anything above that in the basic-rate is taxed 7.5%, higher-rate payers are now to pay 32.5% and additional taxpayers will shell out a whopping 38.1%
The new system results in a vastly increased amount of money payable to HMRC. While you may receive a £5000 tax-free allowance, the extra charges are sure to outweigh the benefits, right?
Advice From Our Tax Accountants in Leeds: 3 Steps You Need to Know
The dividend tax changes could leave you paying significantly more tax than before. However, they don’t have to.
By carefully paying attention to how you earn money through your business, you could avoid higher tax costs. If you know what the allowances and tax bands are, you can find a way to work with them.
Step 1: Be aware
You can take up to £43,000 out of your limited company before you hit the higher rate tax band. It is crucial to remember this number. If you go over, you’ll pay into the higher rate of tax, so you may want to consider other methods of cutting taxable income, such as pension plans.
Step 2: Split your income
Instead of making your earnings mostly via a salary, take advantage of both the lower tax band rate for dividends and the expenses allowance of your business. On anything up to £43,000, pay yourself a £11,000 salary and the rest in dividends.
Step 3: Reap the Savings
For the example given, let’s pretend you’ve made exactly £43,000, splitting it perfectly.
You’ll have paid £2025 in income tax on your earnings thanks to the new dividend tax changes. However, you’ll have saved £2,200 in corporation tax by claiming your £11,000 salary as an expense. By keeping your ‘paid salary’ below £11,000, you also won’t owe extra income tax because you take advantage on your nontaxable personal allowance.
Our Conclusion on the Dividend Tax Change
The dividend tax change is unwelcome for sure, but it isn’t the end of the world and it doesn’t mean you have to pinch your pennies. By simply following a legitimate income system, you can ensure you pay the smallest amount of tax possible on your earnings.
Negating most, if not all, of the harmful effects of the change.