Since April 2016 when the dividend tax credit was replaced, businesses have had to adapt to a new set of rules when paying their taxes…and the next couple of years are only set to bring more change.
In the 2017/2018 year, businesses will still be eligible to receive a tax-free allowance of £5000 on dividends.
But as of April 2018, the tax-free dividend allowance will be slashed from £5000 to £2000.
What will this mean for your tax bill?
This new change is set to impact anyone who pays themselves a low basic salary, combined with the extraction of dividends. Here’s what you need to know about your entitlements:
Tax Year 2017-2018
- Entitled to a personal allowance of £11,500 tax-free income.
– Anything earned above £11,500 will be taxed at 20%, and anything over £45,000 will be taxed at 40%.
- Entitled to a tax-free dividend allowance of £5000.
– Dividends up to £45,000 will be taxed at 7.5%.
– Dividends above £45,000 will be taxed at 32.5%.
Tax Year 2018-2019
- The same tax rates will apply as for 2017-2018, except the 7.5% tax rate will kick in on any dividends earned above £2000 – a change that could result in millions of individuals increasing their tax bill by hundreds of pounds each year.
So, how can you reduce your bill?
Despite these changes to the way dividends are taxed, it is possible to minimise your tax bill, and even avoid paying it altogether. Things to consider include:
- Combining your personal allowance Any personal allowance you don’t use up from your salary can be used to take dividends – i.e. if you were to take a salary of £8,000 you could use the remaining personal allowance of £3,500, plus your £5,000 dividend allowance, to give you tax-free dividends of £8,500 (based on the allowances for 2017-2018). This would give you a tax-free allowance of £16,500 in total.
- National Insurance payments The National Insurance payment threshold for 2017-2018 is £8,164 for the year – so if you keep your salary below this threshold, you won’t have to pay NIC. However, if you wish to increase your dividends to offset this lower salary, you’ll need to check whether this saving will offset the tax you’ll pay on additional dividends.
- Claiming employment allowance For 2017-2018, those that are eligible to claim employment allowance will not have to pay the first £3,000 of employers national insurance. If this applies to you, the chances are it will be more tax-efficient for you to take a salary that includes all of your personal allowance, up to £11,500.
- Tax-efficient investments Don’t forget there are a number of tax-efficient investments out there that offer large allowances for tax-free savings – for example, for 2017-2018 the ISA allowance is £20,000, and for pensions it is £40,000. Be strategic about how you use these investments; your ISA allowance can be maxed out by combining a cash ISA, stocks and shares ISA, and the finance ISA. By making effective use of your entitlement to tax-free savings, it is possible to avoid additional tax hikes completely.
Drawing your profit out
If you’re combining a salary along with dividends, it’s important you keep in mind how the two are taxed differently. Dividends are declared on profits after tax, so you need to always leave enough money in your company to pay your tax bill.
Constantly changing tax rules affect the way you draw your profits out; just because one approach worked for the previous year, it doesn’t mean it will be the most profitable for this year. Ensure your accountant is up-to-date with all changes, both current and future, so that you continue to benefit from tax-efficient strategies, year on year.
If you want to find out more about how changes to dividends tax could affect your business, get in touch with us at Chippendale and Clark – we’d be happy to talk through your circumstances, and how best to manage your taxes to save you more money.