Changes to Dividend taxation
Discussion
Excluding the above X amount isn't it this:
Pre budget
turnover £60,000
expenses £10,000
salary £10,000 (no tax)
profit £40,000
corp tax at 20% - £8000
dividend £30,000
tax on dividend £0
total tax take £8000
Post budget
turnover £60,000
expenses £10,000
salary £11,000 (no tax)
profit £39,000
corp tax at 18% - £7020
dividend £29,000
taxable dividend £24,000
tax on dividend at 7.5% - £1800
total tax take £8820
Pre budget
turnover £60,000
expenses £10,000
salary £10,000 (no tax)
profit £40,000
corp tax at 20% - £8000
dividend £30,000
tax on dividend £0
total tax take £8000
Post budget
turnover £60,000
expenses £10,000
salary £11,000 (no tax)
profit £39,000
corp tax at 18% - £7020
dividend £29,000
taxable dividend £24,000
tax on dividend at 7.5% - £1800
total tax take £8820
Looks like a kick in the guts for anyone running a Ltd as their main source of income and previously taking profits as dividend.
Don't forget you will have already paid 20% corp tax (has that changed?) before you get your hands on any dividend. I haven't done the maths yet but can't be much benefit taking dividends instead of PAYE and paying the NI.
Doesn't come in until April 2016 so hopefully gives time to sort something out.
Don't forget you will have already paid 20% corp tax (has that changed?) before you get your hands on any dividend. I haven't done the maths yet but can't be much benefit taking dividends instead of PAYE and paying the NI.
Doesn't come in until April 2016 so hopefully gives time to sort something out.
Eric Mc said:
You think you can do that easily?
Yes. I'm a national of another country. Their tax system is much more favourable. All my work is office based and clients, as far as I know, don't care where I am based.It'll be an interesting next general election. A huge number of former conservative voters won't forget this in a hurry.
Du1point8 said:
Excluding the above X amount isn't it this:
Pre budget
turnover £60,000
expenses £10,000
salary £10,000 (no tax)
profit £40,000
corp tax at 20% - £8000
dividend £30,000
tax on dividend £0
total tax take £8000
Post budget
turnover £60,000
expenses £10,000
salary £11,000 (no tax)
profit £39,000
corp tax at 18% - £7020
dividend £29,000
taxable dividend £24,000
tax on dividend at 7.5% - £1800
total tax take £8820
Sadly no, there is no 7.5% band, merely that the abolishment of the dividend tax credit means the effective tax on all dividends over £5k will increase by 7.5% This is a major tax hike if you rely on dividends for your income.Pre budget
turnover £60,000
expenses £10,000
salary £10,000 (no tax)
profit £40,000
corp tax at 20% - £8000
dividend £30,000
tax on dividend £0
total tax take £8000
Post budget
turnover £60,000
expenses £10,000
salary £11,000 (no tax)
profit £39,000
corp tax at 18% - £7020
dividend £29,000
taxable dividend £24,000
tax on dividend at 7.5% - £1800
total tax take £8820
MercScot said:
Sadly no, there is no 7.5% band, merely that the abolishment of the dividend tax credit means the effective tax on all dividends over £5k will increase by 7.5% This is a major tax hike if you rely on dividends for your income.
But I think means Du1point8's example is correct (apart from the timing of the CT tax fall to 18%)there is a 7.5% band, instead of a tax credit
From the Budget Document.
NOTE- this does not band the Dividends, but relates the % to which tax band the individual is in. I'm not sure if this is intentional or not. - Look at 1.188
NOTE- this does not band the Dividends, but relates the % to which tax band the individual is in. I'm not sure if this is intentional or not. - Look at 1.188
CoE said:
1.185 The current system of tax credits on dividends was designed over 40 years ago when
corporation tax was more than 50% and the total tax bill on dividends for some was more than
80%. Since then, tax rates including corporation tax have fallen, leaving the Dividend Tax Credit
as an arcane and complex feature of the tax system.
1.186 Alongside further cuts to corporation tax rates for all businesses, the government will
reform and simplify the system of dividend taxation, while maintaining the extensive tax reliefs
for investments held in ISAs and pensions. From April 2016 the government will remove
the Dividend Tax Credit and replace it with a new tax-free Dividend Allowance of
£5,000 a year for all taxpayers. This will ensure that ordinary investors with smaller portfolios
and modest dividend income will see no change in their tax liability – and some will pay less tax.
Summer Budget 2015 45
1.187 Combined with the increases the government has made to the personal allowance and
the introduction of the Personal Savings Allowance, from April 2016 individuals will be able
to receive up to £17,000 of income per annum tax-free, and separately invest up to
£15,240 per annum through an ISA tax-free.
1.188 The government will set the dividend tax rates at 7.5% for basic rate taxpayers,
32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. While these
rates remain below the main rates of income tax, those who receive significant dividend income
– for example due to very large shareholdings (typically more than £140,000) or as a result of
receiving significant dividends through a closed company – will pay more.
1.189 These changes will also start to reduce the incentive to incorporate and remunerate
through dividends rather than through wages to reduce tax liabilities. This will reduce the cost
to the Exchequer of future tax motivated incorporation (TMI) by £500 million a year from 201920.
The tax system will continue to encourage entrepreneurship and investment, including
through lower rates of Corporation Tax.
corporation tax was more than 50% and the total tax bill on dividends for some was more than
80%. Since then, tax rates including corporation tax have fallen, leaving the Dividend Tax Credit
as an arcane and complex feature of the tax system.
1.186 Alongside further cuts to corporation tax rates for all businesses, the government will
reform and simplify the system of dividend taxation, while maintaining the extensive tax reliefs
for investments held in ISAs and pensions. From April 2016 the government will remove
the Dividend Tax Credit and replace it with a new tax-free Dividend Allowance of
£5,000 a year for all taxpayers. This will ensure that ordinary investors with smaller portfolios
and modest dividend income will see no change in their tax liability – and some will pay less tax.
Summer Budget 2015 45
1.187 Combined with the increases the government has made to the personal allowance and
the introduction of the Personal Savings Allowance, from April 2016 individuals will be able
to receive up to £17,000 of income per annum tax-free, and separately invest up to
£15,240 per annum through an ISA tax-free.
1.188 The government will set the dividend tax rates at 7.5% for basic rate taxpayers,
32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. While these
rates remain below the main rates of income tax, those who receive significant dividend income
– for example due to very large shareholdings (typically more than £140,000) or as a result of
receiving significant dividends through a closed company – will pay more.
1.189 These changes will also start to reduce the incentive to incorporate and remunerate
through dividends rather than through wages to reduce tax liabilities. This will reduce the cost
to the Exchequer of future tax motivated incorporation (TMI) by £500 million a year from 201920.
The tax system will continue to encourage entrepreneurship and investment, including
through lower rates of Corporation Tax.
James44 said:
But I think means Du1point8's example is correct (apart from the timing of the CT tax fall to 18%)
there is a 7.5% band, instead of a tax credit
there is a 7.5% band, instead of a tax credit
The Telegraph explains it quite well. Interestingly it also confirms who the changes are really targeted at which is what I suspected in the first place.
Government said:
The changes will start to reduce the incentive for workers to set up companies through which to be paid, allowing them to be remunerated through dividends rather than wages in a bid to reduce tax bills, the Government said.
"This will reduce the cost to the Exchequer of future 'tax-motivated incorporation' or TMI by £500m a year from 2019-20," the Treasury said, adding that the tax system "will continue to encourage entrepreneurship and investment, including through lower rates of corporation tax".
IR35 was not an effective enough deterrent so the Treasury & HMRC are attacking contractors from another angle."This will reduce the cost to the Exchequer of future 'tax-motivated incorporation' or TMI by £500m a year from 2019-20," the Treasury said, adding that the tax system "will continue to encourage entrepreneurship and investment, including through lower rates of corporation tax".
As somebody who set up a business in 2007, worked very hard through the recession to get it going nearly caving in financially in the process, and only got to a position where I could pay myself dividends 18 months ago, I'm quite peed off about this.
Perhaps I should instead dramatically increase my company pension contributions as a way to benefit from my hard earned profits?
And as I intend to sell the business in 3 years or so then hopefully I can leave some, though not excessive, cash in the business to benefit from entrepreneurs' relief. But as they now seem out to hit small businesses I suppose ER with its 10% CGT will be ditched in the next budget.
Perhaps I should instead dramatically increase my company pension contributions as a way to benefit from my hard earned profits?
And as I intend to sell the business in 3 years or so then hopefully I can leave some, though not excessive, cash in the business to benefit from entrepreneurs' relief. But as they now seem out to hit small businesses I suppose ER with its 10% CGT will be ditched in the next budget.
Edited by RegMolehusband on Wednesday 8th July 21:17
This didn't quite sink in whilst i was listening to the budget, but upon doing the math it's pretty staggering what a large change it is!
From what i can work out compared to this year it would be as follows -
From what i can work out compared to this year it would be as follows -
2015-2016 2016-2017
0% 10,600 11,000
20% 31,785 32,000
40% 107,635 107,000
45% >150,000 >150,000
Div Tax Credit 10% 0%
Div Tax Free 0 5,000
Div Tax (20%) 0% 7.5%
Div Tax (40%) 25.0% 32.5%
Div Tax (45%) 30.56% 38.1%
Corp Tax 20% 20%
E.g. on 100k profit taken as dividend over personal allowance
Corp Tax 20,000 20,000
Gross Div 80,000 80,000
Div (0%) 0 5,000
Div (20%) 28,606.50 32,000
Div Tax (20%) 0 2,400
Div (40%) 51,393.50 43,000
Div Tax (40%) 12,848.38 13,975
Div (45%) 0 0
Div Tax (45%) 0 0
Total Tax £32,848.38 £36,375.00
So can I assume that starting and running a company having employees paying their way and paying my way in society with all of the agro et al whilst taking dividends on a monthly basis I may as well be better off now getting a job on PAYE?
I'm sure my accountant will provide more details and offer advice however it seems those that take a chance are being well and truly kicked in the balls.
I'm sure my accountant will provide more details and offer advice however it seems those that take a chance are being well and truly kicked in the balls.
So can I assume that starting and running a company having employees paying their way and paying my way in society with all of the agro et al whilst taking dividends on a monthly basis I may as well be better off now getting a job on PAYE?
I'm sure my accountant will provide more details and offer advice however it seems those that take a chance are being well and truly kicked in the balls.
I'm sure my accountant will provide more details and offer advice however it seems those that take a chance are being well and truly kicked in the balls.
I must say this is a very unwelcome change.
As others have posted, there appears to be a new effective tax rate starting at 7.5% on dividends for basic rate earners over and above £5000.
Previously there was no extra tax on this amount (after corporate tax has been paid).
Whilst there has been an increase of £1000 to the employer's national insurance allowance, and a 1% drop in the corporation tax rate, the effect is that I will need to pay a few thousand pounds extra per year income tax as a result of the budget.
Also, I find it a bit misleading when politicians refer to the first £10,000 or £11,000 as being tax free. It is only income tax free.
If you run your own company and you pay yourself at this level, you are still paying employee and employer's contributions above the NI threshold level (which is around £8,100 per year).
The marginal rate on your "tax free" salary above this level is still circa 25% from National Insurance on its own.
As others have posted, there appears to be a new effective tax rate starting at 7.5% on dividends for basic rate earners over and above £5000.
Previously there was no extra tax on this amount (after corporate tax has been paid).
Whilst there has been an increase of £1000 to the employer's national insurance allowance, and a 1% drop in the corporation tax rate, the effect is that I will need to pay a few thousand pounds extra per year income tax as a result of the budget.
Also, I find it a bit misleading when politicians refer to the first £10,000 or £11,000 as being tax free. It is only income tax free.
If you run your own company and you pay yourself at this level, you are still paying employee and employer's contributions above the NI threshold level (which is around £8,100 per year).
The marginal rate on your "tax free" salary above this level is still circa 25% from National Insurance on its own.
Sonic said:
This didn't quite sink in whilst i was listening to the budget, but upon doing the math it's pretty staggering what a large change it is!
From what i can work out compared to this year it would be as follows -
Don't forget to factor in taking some salary (15/16- £10.6k and 16/17- £11k) (you will have some NI to pay but it'll be fairly minimal) Doing this, total tax for 15/16 will be £29,120 and for 16/17 will be £31,885. Obviously still a difference between the old system and the new but there is still a saving compared with your above example.From what i can work out compared to this year it would be as follows -
2015-2016 2016-2017
0% 10,600 11,000
20% 31,785 32,000
40% 107,635 107,000
45% >150,000 >150,000
Div Tax Credit 10% 0%
Div Tax Free 0 5,000
Div Tax (20%) 0% 7.5%
Div Tax (40%) 25.0% 32.5%
Div Tax (45%) 30.56% 38.1%
Corp Tax 20% 20%
E.g. on 100k profit taken as dividend over personal allowance
Corp Tax 20,000 20,000
Gross Div 80,000 80,000
Div (0%) 0 5,000
Div (20%) 28,606.50 32,000
Div Tax (20%) 0 2,400
Div (40%) 51,393.50 43,000
Div Tax (40%) 12,848.38 13,975
Div (45%) 0 0
Div Tax (45%) 0 0
Total Tax £32,848.38 £36,375.00
Edited by TheHound on Wednesday 8th July 22:03
HoHoHo said:
So can I assume that starting and running a company having employees paying their way and paying my way in society with all of the agro et al whilst taking dividends on a monthly basis I may as well be better off now getting a job on PAYE?
I'm sure my accountant will provide more details and offer advice however it seems those that take a chance are being well and truly kicked in the balls.
I too am pissed off with this, however we still pay less tax than our PAYE counterparts. I'm sure my accountant will provide more details and offer advice however it seems those that take a chance are being well and truly kicked in the balls.
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