Legislation in the Finance Act 2016 coming into force from April 2016 could see Directors paying more tax as a result.

imrsPreviously, Directors and Share Holders were able to make use of the national 10% tax credit on Dividends up to the Basic Rate threshold. But due to the change in the Finance Act, from April 2016, this legislation has been removed, and instead been replaced with something which will see thousands of Directors paying more Income Tax as a result.

As an example, previously a Director who had a Basic Salary of £8060 and Dividends of £30892.50 would pay no Income tax.

However, under the new legislation, a Director with the same Basic Salary and Dividends from April 2016 will see an Income Tax bill of £1721.44. (£2582.16 when you include 1/2 Estimate on Account for January 31st in the first year).

From April 2016, Directors and Share Holders will only benefit from a £5000 Allowance (Tax-Free) instead of the 10% tax credit.

Previously it was common to see a Director apportion his income based on how best to save on Income Tax and although this is still true, it will be harder to avoid paying more once the new legislation becomes active.

It should be noted that you do not pay tax on Dividends from shares in an ISA.

Tax bands and rates from April 2016

Tax bandTax rate on dividends over £5,000
Basic rate 7.5%
Higher rate 32.5%
Additional rate 38.1%

Tax band and rates up to April 2016

Tax bandEffective Rate
Basic rate (and non-taxpayers) 0%
Higher rate 25%
Additional rate 30.56%
Additional rate - dividends paid before April 2013 36.11%

The difference between the change in legislation means Upper rate taxpayers pay tax at 38.1% instead of an effective rate of 30.55% in 2015/16.

Higher rate taxpayers pay tax at 32.5% instead of an effective rate of 25% in 2015/16 and basic rate taxpayers pay tax at 7.5% instead of 0% in 2015/16.

 

If you wish to discuss how the change to the Finance Act affects you, or anything else, why not contact Moonlite Accounts today to book a free appointment.

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