Every year, you are likely to receive dividend income from your limited company. You will normally pay dividend tax on your earnings, however from 6th April some changes will impact on how your company is taxed.
Why are things changing?
In his summer 2015 budget, the Chancellor made it clear that it would not be possible to push on with reducing Corporation Tax to 18% if there remained such strong incentives for contractors to set up limited companies. The dividend tax system had not changed whilst Corporation Tax levels had dropped rapidly.
What is changing for limited company contractors?
With effect from the 2016/2017 tax year, the way dividends drawn from a contractor’s limited company will be taxed differently. These changes to dividend tax rates could potentially result in additional personal tax liabilities when the contractor completes their self-assessment tax return. The lower tax rates have created more tax planning opportunities and this needed to be dealt with.
To balance the equation, plans to replace the lower tax rates applicable to dividends with a lower tax free dividend allowance of £5,000 were introduced. This allowance will be accompanied by increases in tax rates on dividend income.
From 6th April 2016, the new rates of Dividend Tax will be 7.5% within the basic rate band, 32.5% within the higher rate band and 38.1% within the additional rate band. This equates to an overall increase of 7.5% where dividend income is in excess of £5000 in the tax year.
What does this mean for me?
If you are a contractor with a limited company, the chances are you will be receiving a minimal salary and receiving the rest of your income in the form of dividends (after all this has always been one of the key advantages of incorporation) and you will pay more tax if your dividend income is in excess of £5,000.
If you have a shareholding worth in excess of £140,000 you will pay more tax.
The Chancellor asserts that 85% of people who receive dividends will not be affected.
An attack on contractors
We have already written about the changes that are expected to occur post April 2016 where there will be restrictions on tax relief on expenses for contractors. These changes are expected to drive an increase in incorporations of limited companies for contractors who traditionally may have used umbrella companies. This tax relief restriction, together with the reduced income available from dividents via limited companies appears to be a concerted attack on the flexible workforce that the UK is proud of.
What can One Click do?
One Click is here to help you get the advice you need to make that you understand what is happening and ensure you’ve got the best strategy to maximise your income whilst remaining compliant.
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Along with over 13 years experience in the contractor payroll industry, and after spending most of his working life as a financial advisor in the regulated financial services industry, Mike has garnered an extensive network of contacts in the recruitment industry, many of whom trust both him and the One Click Group to handle their accounting. Mike has also been a member of various industry bodies throughout the years, such as the British Institute of Recruiters, in order to champion best practices across the contractor payroll industry.