In the past, a basic-rate taxpayer was not liable for tax on dividend income. However, higher-rate and additional-rate taxpayers were, paying 25% and 30.6% respectively.
This was subsequently followed by a new dividend tax scheme, introduced in April 2016. Income from dividends above £5,000 was taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate, and 38.1% for additional-rate.
And now the dividend allowance is set to be cut from £5,000 to £2,000 in April 2018.
What’s the Proposed Dividend Change in 2018?
The Chancellor announced in the 2017 Spring Budget that the tax-free allowance on dividend income was to be reduced to £2,000 from £5,000 for dividends paid on or after 6 April 2018. This was to address perceived ‘unfairness’ around Director and Shareholder tax advantage.
Here’s how this will look in practice:
- From April 2018, shareholders can earn up to £13,500 in dividends without paying tax (£2,000 dividend allowance plus £11,500 personal allowance).
- This means shareholders will be down £225, £975, or £1,143 a year depending on the rate at which they pay tax.
A Quick Example
A company director earns £56,500 (£11,500 personal allowance + £45,000 in dividend income).
From April 2018, the reduction in dividend allowance will lead to an increase in personal tax liability of £975. This is because an additional £3,000 is liable for taxation at 32.5%.
Plan Now to Pay Less
It should be noted that the government remain committed to raising the personal allowance to £12,500 and increasing the higher-rate threshold, which should offset this change somewhat.
However, against the backdrop of a turbulent political landscape, this is all subject to change. It makes sense to plan carefully for the realities of post April 2018.
With that in mind, if your company has a sufficient level of profit, you should consider making dividend payments prior to 6 April to take full advantage of the £5,000 tax-free allowance.
Beyond that, we can help you plan for tax and reduce your liabilities in 2018 via one of our Super 6 services: Pay Less Tax.
Contact us today to speak with one of our friendly advisors to get started.