Tax on dividends
Dividend income over £5,000 will attract higher tax after 5 April 2016, so accelerating dividend payments before then to avoid paying the higher rates of tax could be a good idea. Before you start thinking about doing so, however, there are a few things to consider.
What is the tax rate on dividends now?
From now up until 5 April 2016, dividend income will be taxed at current rates, where a basic rate-taxpayer pays 0%, higher rate is at 25%, and additional rate tax is at 30.5%.
How does the new tax on share dividends work?
From 6 April 2016, the first £5,000 of dividend income in each tax year will be tax-free. Above that sum, a basic-rate taxpayer will pay 7.5% tax, a higher rate taxpayer 32.5%, and an additional rate taxpayer 38.1%.
How is tax on dividend income paid?
Tax on dividend income is payable through the Self-Assessment Tax System and not at source; but the situation with the new tax on dividend income, inevitably, has implications for tax on your personal income, benefits and allowances. Please see the separate article on this issue.
When is tax due on accelerated dividend payments?
Accelerating a dividend like this will mean that any tax due on it will be payable a year earlier. Therefore, some planning is important to ensure that there are funds to pay any tax due on 31 January 2017 through the self-assessment tax system.
Is the change bad for everyone?
Basic-rate taxpayers who receive more than £5,000 in dividends will pay more, but higher-rate taxpayers with £5,000 or less in dividend income will gain, because the current 25% they would pay under the old regime on the whole sum (£1,250), under the new regime, will be tax free.
Are you thinking of accelerating your dividend payment? What should you consider?
Many taxpayers, possibly basic rate taxpayers most of all, will want to take advantage of the old rates and try to accelerate dividends before the current tax year finishes on 5 April 2016. HMRC anticipate that many shareholders will be following this line of thinking, which is why it is possible that the tax authorities will request a review of dividends paid out by your company if paid out late in the current tax year. If HMRC select your company for a review, what should you have done beforehand to protect yourself?
- Have you taken out the company’s profits each year? Do you have the reserves to pay further dividends in the current tax year? You must check, and discuss with your accountant manager if uncertain.
- Does your company have distributable reserves to pay dividends? If not, it is illegal to pay a dividend.
- Are you sure of the procedures to prepare the dividend paperwork? The minutes and dividend vouchers should be prepared with care.
Now you must consider how an accelerated dividend payment will affect your income and tax liability
Supposing everything’s in order and your company has sufficient profits to make a maximum dividend payment before 5 April 2016. Now you must consider the benefits and tax question:
- If you have children, will a dividend payment take your income over £50,000? If it does, you will lose child benefit.
- Will the dividend payment take your income over £100,000? If it does, you will lose your personal allowance.
What else might you do, supposing your company has no distributable reserves?
If your company has zero distributable reserves, you cannot accelerate a dividend payment. However, if your loan account is overdrawn, you could look at writing it off before 5 April 2016. Under certain circumstances, a loan-account write-off can be taxed in the same way as a dividend, but a national insurance liability could result. Please discuss with your account manager before making any decision.
Conclusion
It is vital that your decision to accelerate a dividend payment is an informed and forward thinking one: how will dividend income affect other benefits and allowances, what is the tax implication for January 2017, do you have sufficient reserves in the company?
For some, accelerating a dividend payment will be worth considering, and for anyone intending to do so you must contact your account manager to discuss all the implications. Act fast, though, to make sure everything’s in order before 5 April 2016.
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