Treasury guidance released
The Summer Budget produced a number of nasty surprises for contractors and none more so than the announcement that a new dividend tax will be introduced as from 6th April 2016. This will see the 10% notional tax credit on dividends abolished and replaced by a £5,000 dividend tax allowance. Except this is not an allowance but rather a zero rate of income tax applicable to dividend income only.
Other than the Chancellor’s announcement there has been no information about how the dividend tax allowance will operate in practice, until now. The Institute of Chartered Accountants in England and Wales (ICAEW) Tax Faculty has been working with the Treasury to produce some guidance which was published on Monday. Click here to view the guidance.
What will not change is that dividends will continue to be treated as an individual’s top slice of income. The first £5,000 of that income will, however, be taxed at 0% and then:
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7.5% on £27,000 (remainder of basic rate band)
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32.5% on £32,000 – 150,000 (higher rate band)
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38.1% on £150,000 plus (additional rate band)
Illustration
In 2016/17, Kate extracts profits from her PSC in the following manner:
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Salary; £11,000
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Dividends; £70,000
Her tax liability will be:
Salary £11,000
Dividends £70,000
= £81,000
Less: Personal allowance (£11,000)
Taxable income £70,000
Tax due:
Dividend allowance; £5,000 @ 0% = £0
Basic rate band remainder; £27,000 (£32,000 – £5,000) @ 7.5% = £2,025
Higher rate band; £38,000 @ 32.5% =£12,350
Total £14,375
Great illustration for numpties like me with no time to do the math (as a rule). Could you show Sally’s tax if it had been 2015/2016, so we can see how much worse/better off she will be?
Thanks from another numpty – would also like to see the comparison though.
Agree with other comments, can we have a comparison from someone ?
Using a calculator from another website and accounting for different personal allowance…
Gross dividend: £78,888.89
Total gross income: £88,888.89
You are a higher rate tax payer (limit is £31,865 + personal allowance of £10,009). Extra tax is payable on dividends
£ 47,014.89 of your gross dividend income is subject to further tax at 22.5 %
The extra tax to pay is £ 10,578.35 ( 15 % of net dividend).
Calculation based on:
SALARY (PAYE) £10000
DIVIDEND £71000
OTHER INCOME £
TAX CODE 1000L
TAX YEAR FISCAL YEAR 2014/15
I am confused about these new dividend rules. And various web sites come up with varying figures.
Let’s say my gross income into the company is £95,000
I pay £2,000 in expenses (accountant etc.)
I pay £8,000 in salary
I pay £40,000 into my pension
I pay £45,000 as dividend
How much tax will I pay?
A very good comparison table is shown at the following web page.
http://www.itcontracting.com/new-dividend-tax-april-2016/
The site mention above has also a calculator which shows comparison between this year and next year tax at http://www.itcontracting.com/calculators/2016-2017-dividend-tax-increase-calculator/