The dividend tax was introduced in April 2016 and the first tax year it related to was 2016/17 (year to 5 April 2017). We have now gone through the cycle a couple of times. It is currently 7.5% if you are a basic rate taxpayer, 32.5% if you are a higher rate taxpayer, and 38.1% if you are an additional rate taxpayer.
In respect of the dividend tax, everyone has a dividend allowance, which relates to dividend income they can receive before having to pay dividend tax. For 2016/17 and 2017/18, this was £5,000 p/a. It was reduced from 6 April 2018 to £2,000 p/a. The allowance is a ‘use it or lose it’ allowance. As it has been reduced, we have been working hard to make sure that clients have used it!
As with all taxes, there have been consequences (unintended or otherwise) of the dividend tax. The following are some of the more common ones we have come across.
- Shareholders now have to complete tax returns and pay tax. Under the old regime, as long as there was no further tax to pay, there was no legal requirement to complete a tax return. However, this new tax means that, if there’s tax to pay, then there’s a tax return to complete too.
- In addition to completing tax returns and paying tax, the shareholder may also have to make payments on account. This is the acceleration of personal tax payments, and can be a nasty surprise when it is first encountered.
- Income may be taken where it was not previously. This predominantly relates to a situation where a director/shareholder may have separate employment income (in addition to their limited company). In this scenario, it would not have been worth also paying a salary from the company. However, if their dividend income is being taxed, then taking salary reduces the amount which needs to be taken as dividend. The same principal can also apply to rental income (again in the right circumstances).
- Personal tax has become more optional. For directors/shareholders of owner managed limited companies, this has always been the case to a certain extent. However, it is now more important that personal income is managed, in order to use allowances and spread/limit the personal tax burden. This may even extend to declaring dividends in periods after a business has stopped trading.
- If directors/shareholders of small businesses make personal pension contributions, these should be made from the company rather than personally. Before the dividend tax, it didn’t really make much difference. However, it makes more sense to pay it from the company rather than out of money which has already been taxed.
There will undoubtedly be other consequences of the dividend tax, but these are some of the more common ones. If you need any help navigating the effects of this, please don’t hesitate to get in touch.