8502490As part of his Summer Budget the Chancellor announced changes to the Tax arrangements for Dividends which will apply from next April 2016.

This effects many Small Business owners who receive part of their income through Dividends. So if you are concerned how this may effect you we have created an illustration to help you understand how it works.

The current Dividend Tax Credits, which for Basic Rate Tax Payers effectively cancel out any Tax liability will be abolished. So Dividend income over £5,000 will be subject to a Dividend Income Tax.

Here are a couple of examples:

2016/2017
Personal Tax Allowance £11,000
Salary £8,000
Dividend Income £10,000

Total income for the year is £18,000. After taking salary into account there is £3,000 Personal Tax Allowance remaining. Apply this £3,000 to the £10,000 Dividend Income to receive the full £11,000 Tax Free Personal Allowance.

For the remaining £7,000 Dividend income you can then deduct the new £5,000 Dividend Allowance. which leaves £2,000 which will be liable for Dividend Income Tax at 7.5% (for Basic Rate Tax Payers). The Tax liable will be £150

2016/2017
Personal Tax Allowance £11,000
Salary £11,000
Dividend Income £20,000

The Personal Tax Allowance has been fully applied to salary. Deduct the £5,000 Dividend Allowance from the £20,000 received leaving £15,000 liable for Dividend Income Tax at 7.5% (for Basic Rate Tax Payers). The Tax liable will be £1125.

This Tax Liability forms part of the Self Assessment process.

If you would like further advice on how this or any other issue will effect you or your business do get in touch.

The Counting House
Small Business Accountancy

Contact us to see how we can help your business.

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