Dividend allowance cuts tax advantages for owner managers
Following changes to dividend tax announced in the Summer Budget, which capped the annual dividend allowance at £5,000, HMRC has produced a factsheet on the new tax-free dividend allowance, which will hit the majority of owner managers who currently use a low salary/high dividend approach.
The rules will come into force in April 2016 and replace the current dividend tax credit, along with changes to the headline rates of dividend tax.
Under the new rules, no tax is payable on the first £5,000 of any dividend income, which is a boost for the majority of small investors, but will hit owner managers.
However, this would require a significant change in current preferred practice where owner managers frequently use a low salary/high dividend profit extraction model to pay themselves instead of keeping more retained profits within the company. This could happen in light of the proposed reduction in corporation tax rates to 18% by 2020.
From April 2016 tax rates payable on any dividends over £5,000 are:
7.5% on dividend income within the basic rate band;
32.5% on dividend income within the higher rate band; and
38.1% on dividend income within the additional rate band.
HMRC’s factsheet includes a number of examples showing how the new approach will affect different categories of taxpayer, depending on income levels according to Harris & Co chartered accountants Northampton, the specialist small business accountants.