In our budget update, we reported that there would be changes in the way dividends were taxed from April 2016. The chancellor noted that this would simplify reporting for individuals who receive dividends.
What he failed to mention was that it would affect shareholders of private companies also, many of whom decide to draw profits from their company by way of dividend.
In summary, the new tax rates will be:
- 7.5% on basic rate tax payers (previously 0% effective with the tax credit)
- 32.5% on higher rate tax payers (previously 25% effective with the tax credit applied)
- 38.1% on Super high rate tax payers (previously 30.6% effective with tax credit applied)
As this affects a great number of our clients, we have been reviewing whether it is still more efficient to draw funds from a company by way of dividend or increasing your salary through the payroll.
Having calculated the figures, dividends are still going to be more efficient moving forwards, however, client earning up to £100,000 and taking the majority of income as dividends should be looking to set aside anything between £1,500 - £3,500 extra per year for this new tax regime. For clients earning above £100,000 the figure is higher (depending on how much the earnings level is).
We will be looking at each of our clients' positions for next year and will be in touch before the next tax year starts to assess the impact for each person individually. However, we wanted to make you aware at this early stage so that this issue can be considered as far in advance as possible.
If you have any queries, please contact a member of the team here at Inspire.
Chris Downing, CTA, ACA, MAAT, Director