April 2016 will see a significant change to the taxation of dividend income.
- The changes are aimed at reducing the perceived tax planning advantage gained when businesses are incorporated and profits extracted in the main by way of dividends.
The new rules:
- a tax-free annual Dividend Allowance of £5,000
- abolish the dividend tax credit
- amendments to the tax rates on dividends to 7.5%, 32.5% and 38.1%.
Previously basic rate taxpayers paid 0% tax on dividends until the point at which they became a higher rate taxpayer. Therefore, these taxpayers will be the most affected by the changes.
However:
- dividends do not incur a National Insurance liability
- a company owned jointly by a husband and wife could potentially benefit from £10,000 tax-free dividends from April 2016
- the rate of corporation tax is set to fall to 18% in 2020. Significantly cheaper than self-employed income tax and class 4 National Insurance
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