Where a business has sufficient profits to allow it, taking dividends has always been a tax advantageous way of getting money out of businesses since they are not subject to national insurance and the effective tax on them is generally lower than that on standard earnings. However, from April 16 the way dividends work is changing.
There will be two changes under the new proposal; the first is introduction of a £5,000 tax free dividend allowance, which replaces the notional tax credit of 10%, and the second is a change in tax rates.
Overall this means that Higher and Additional tax rate payers will be better off on dividends of up £21,666 and £25,250 (respectively) and for Basic rate tax payers there will be no change on dividends up to £5,000. However, the effective tax rates (net of the notional Tax credit) have increased from 0% to 7.5% for Basic rate payers, from 25% to 32.5% for Higher rate Tax payers and from 30.6% to 38.1% and this increases the tax liability that will be due after these points.
All in all dividends will still remain one of the more efficient ways to extract profits from a business though the best way can depend on other factors that are more specific to the individual and company. So, if you do feel that this is a matter that would be worth looking at for you then please feel free to discuss the changes with a member of the summ.it team as we’d be happy to help look at your options.