Tax on dividends is changing – plan ahead now!
What are the current rules?
Under current tax rules any dividend you receive is deemed to have been received less a 10% notional tax i.e. you are actually receiving 90% of the full amount of the dividend. This is grossed up to the full 100% when you enter this is your personal tax return. In the calculation of your personal tax this 10% is then knocked off as tax paid.
‘This is a ridiculous method of doing things does this really happen?’ Yes, this is a really strange process but that’s what actually happens!
Dividends are taxed on the grossed up amount at 10% on earnings up to £42,385, 32.5% on earnings up to £150,000 and at 37.5% on earnings above this amount.
Dividends will no longer be grossed up. i.e. you will be deemed to have received the full 100%. Under the new rules everyone will get a £5,000 dividend allowance under which no tax is due on dividends. The £5,000 is included as part of your basic rate allowance. There will be no ‘notional tax’ deducted in your tax calculation. Above this dividends will be taxed at 7.5% on earnings up to £43,000, 32.5% on earnings up to £150,000 and 37.5% on earnings above this amount.
I don’t care about the rules just tell me the numbers!
Example: You currently receive a salary of £10,600 and a dividend of £30,000.
Under current tax rules you would have a personal tax bill of £348.
Under the new rules your personal tax bill would shoot up to £1,845!
Example: You currently receive a salary of £10,600 and a dividend of £60,000.
Under current tax rules you would have a personal tax bill of £7,848.
Under the new rules your personal tax bill would shoot up to £10,995!
If you currently draw a dividend from your company then speaking to your accountant about tax planning may save you a significant amount on your personal tax bill and stop any nasty surprises. At Sapphire we specialise in planning ahead so you always know where you are with your personal finances.