7.5% Dividend Tax

April 6th 2016 marked a complete overhaul of the dividend tax system. This changes have directly resulted in a complete tax hike for the majority of limited company owners. Beneath we will explain how these new measures are likely to cost you.

What Has Changed Under The New System:

The Government have come to the belief that the way in which dividends were taxed prior to the changes, including the dividend tax credit, was “complex” and “arcane”. The old system was constructed at a time when Corporation Tax as more substantial than it is now. The Chancellor is of the belief that many people now conduct employment through a personal limited company for purposes of saving tax.

The government estimates that the new dividend tax is likely to raise £2.54 billion during 2016/17. This money the government argues can be used to help buoy up the financial shortfall in public spending.

How Are Dividends To Be Taxed Following The Changes?

The old system, which was abolished on or after April 6th 2016 has been replaced by a simpler system. Once the personal allowance has been considered, this figure is now £11,000 from April 2016 contingent on the individual being entitled to the entire amount, individuals are able to receive £5,000 of dividend income with a zero tax liability.

Therefore, if your total income is less than £16,000 per year or less, you will pay absolutely now dividend tax at all. Under the changes, three new tax rates have been implemented. These new rates apply to all dividend income that exceeds £5,000 per year, these are as follows:

• 7.5% Basic rate.
• 32.5% higher rate.
• 38.1% additional rate.

Compare Dividend Tax Take Table

In order to help put the new dividend tax rates into perspective, we have constructed the table beneath. It shows the level of dividend tax that you will pay in 2016/17, compared to under the old rules. This table is constructed on the assumption that you will take the personal allowance as salary in each year, £10,600 for 15/16 and £11,000 for 16/17.