The taxation of dividends

Martin Copland
Martin Copland

I heard that the spring budget announced that people would be paying more tax on dividends from their limited companies.  Is this correct and should I move back to being a sole trader?

Answer:

The taxation of dividends has changed in recent years and the spring budget did announce a further change. The removal of the tax credit on dividends from April 2016 is the first of these changes and means that amounts up to the basic rate band are no longer effectively tax free. For the 2016/17 tax year, individuals receive a £5,000 tax-free dividend allowance and dividends above this amount are then taxed at 7.5% (basic rate), 32.5% (higher rate) and finally 38.1% (additional rate).

The recent announcement in the spring budget which you are referring to relates to the tax-free dividend allowance and the reduction of this from £5,000 to £2,000. This will not come into force until 6 April 2018.

The additional tax due in the 2018/19 tax year will depend upon the amount of other income received. An individual who has some of their basic rate band remaining will see an additional £225 in tax, someone who has income above the basic rate band will pay an extra £975 and additional rate taxpayers will see an increase of £1,143.

While these changes may cause people to have the knee-jerk reaction of thinking about moving from a limited company structure to a sole trade or partnership structure, other changes that are incoming, such as the reduction in Corporation Tax rates, may negate the benefits of any disincorporation.

It is therefore important to take into account the levels of expected profit and to consider the bigger picture before making a decision about whether to continue as a limited company, as even though the allowance has reduced, it may still be beneficial for you to carry on in this structure given the other factors which are involved and the changes that will be applied to these.

If you are unsure and would like to discuss your circumstances in greater detail, Ashdown Hurrey can advise on personal tax matters in addition to other tax, accountancy and business matters. Contact Martin Copland on 01424 720222 or email him at martinc@ashdownhurrey.co.uk.

*The question was asked by Mrs G of Eastbourne