Dividend tax changes from 6 April 2016

Dividend tax changes from 6 April 2016What is a dividend?

A dividend is a specific sum of money that is paid by a company to its shareholders out of its profits.

A dividend must only be paid from the company profits, after all company taxes and liabilities have been considered.  In simple terms, if a company had income of £1,000 and allowable expenses before tax of £250, this would give profits before tax of £750.  Corporation tax of 20% (reducing to 19% from April 2017) is then deducted, leaving profits available for dividend distribution of £600.

Paying a dividend is the decision of the company directors and can be as often as they like; monthly, quarterly or annually.

How are dividends paid to shareholders?

It is simply a payment from the business directly to the shareholders.  However if you have multiple shareholders, then dividends need to be paid to them according to the shares they hold.

If there are two shareholders, both holding equal shares in the same class then each time the directors decide to pay a dividend, then both of the shareholders will need to be paid the same amount, at the same time.  However if there are different classes of shares, for example A and B shares both with rights to dividends, means the directors can choose to pay dividends to one class and not the other.

Each time a dividend is paid or declared, the correct paperwork needs to be prepared, which consists of a resolution that shows the amount of the dividend and the date this is paid.  Then each individual shareholder will have a dividend voucher, showing their proportion of the dividend. 

How are dividends taxed?

Dividends form part of an individual’s personal income and therefore taxes will be paid by the shareholder, based on their own circumstances.  The taxes are not a company liability.

Since 6 April 2016, the first £5,000 of dividends will be effectively taxed at 0%.  Any remaining dividends will be taxed based on whether they fall into the following bands:

  • 5% – within the basic rate band
  • 5% – within the higher rate band
  • 1% – within the additional rate band

An example of how dividends are taxed in 2016/17, assuming a personal allowance of £11,000 and the basic rate band limit of £32,000.

Personal Income: salary £11,000 + dividends £32,000

This would maximise the basic rate band fully.  The salary would be covered by the personal allowance.  The first £5,000 of the dividends would be taxed at 0%, the remaining £27,000 would be taxed at 7.5% = giving a personal tax liability of £2,025.

Personal Income: salary £8,060 + dividends £50,000

This would push some income into the higher rate band.  The salary of £8,060 would be covered by the personal allowance and the remaining allowance would reduce the taxable dividends by £2,940.  This would leave £32,000 dividends within the basic rate band, £5,000 taxed at 0% and £27,000 taxed at 7.5%, with the remaining dividends of £15,060 taxed at 32.5% =  giving a personal tax liability of £6,920. 

How Aardvark Accounting can help you?

We can help you to get your head around the tax dividend changes, and simplify the jargon for you. Plus, make sure you that you are maximising your allowances and being as tax efficient where possible based on your circumstances.

The best value for personal service and tailored accountancy packages to suit you.  You’ll always have someone on hand to put your mind at ease from your financial worries.  Contact Aardvark Accounting today, we’ll do the “aard” work for you!

01425 471917 or contact us here