As of April 6, 2016, new HMRC rules have changed tax on dividends. Dividends payable by personal service companies, where a contractor is their own managing director, will be taxed in a different way.
April allowance changes in brief
- Recipients of dividends now get a £5,000 personal dividend allowance
- This is not a tax-free allowance – if your salary and dividends tip you into the higher rate tax bracket, your dividend allowance will be subject to income tax.
- The new basic rate of dividend tax is 7.5 percent up to £32,000. The previous rate was effectively 0 percent.
- The new higher rate of dividend tax is 32.5 per cent up to £43,000. The previous rate was 25 percent.
- The new additional rate is 38.1 per cent for anything above £43,000. The previous rate was 30.56 percent.
- Winners are those who previously had a high salary with small amounts of dividends, below £5,000.
- Losers are people who earned significant income from dividend payments.
- Using other allowances like ISAs, pensions and capital gains may be more tax-efficient for some.
- Tax planning and delaying dividend payments may be beneficial for some company directors.
Contact ContractingWISE for a free consultation about your circumstances and how the new dividend changes affect you. Our trusted partners including accountants and tax compliance experts who can help you navigate the new dividend system.