New Dividend Tax – What Is The Actual Cost?
The Summer Budget introduced a new tax on dividends to come into effect from 6 April 2016. There has
been much speculation as to how much this will affect individuals and whether for some, continuing to
operate their businesses through a limited company will be worthwhile.
The actual ‘effective’ cost however, is in virtually all cases far lower than the 7.5% additional tax that has
been levied due to a combination of the tax free allowance, giving the first £5,000 of all dividends received in
a year tax free, with the additional tax charge levied only on amounts in excess of this. Going forwards, the
reduction in the level of corporation tax to 19% and then 18% will reduce the tax levels further for owner
managers and help offset the 7.5% by 2020.
Taking various different levels of income and profits, we illustrate below the overall net tax effect of the
changes. The change in the effective rates is indicated in red in each case and incorporates both the £5,000
dividend allowance and the change in Corporation Tax Rates combined.
Each of the examples below assumes that the majority of the profits generated in the company have been
withdrawn by way of dividend, however it would not matter what level of profits the company made. There
has also been no account taken of National Insurance charges on the salaries as this will remain consistent
throughout.
Example 1
Basic salary of £8,000 with company profits of £35,000. The after tax profits of £28,000 withdrawn by way of
dividend.
Personal Tax
Salary
Net Dividends
Tax Credit
Personal Allowance
Taxable Income
Tax at 10%
Tax at 0%
Tax at 7.5%
Tax Credit
Total
Tax In Company
Profits
Tax at 20%/18%
Available To Draw As Dividend
Combined Tax Paid
Overall Combined Rate Of Tax
Change in effective rate from now
16
2015/16
£
8,000
28,000
3,111
39,111
(10,600)
28,511
2016/17
£
8,000
28,000
36,000
(11,000)
25,000
2020/21
£
8,000
28,000
36,000
(11,000)
25,000
2,851
(2,851)
-
1,500
1,500
1,500
1,500
35,000
(7,000)
28,000
7,000
19.44%
35,000
(7,000)
28,000
8,500
23.61%
+ 4.17%
35,000
(6,300)
28,700
7,800
21.67%
+2.23%
Example 2
Basic salary of £8,000 with company profits of £50,000. The after tax profits of £40,000 withdrawn by way of
dividend.
Personal Tax
Salary
Net Dividends
Tax Credit
Personal Allowance
Taxable Income
Tax at 10%
Tax at 0%
Tax at 7.5%
Tax at 32.5%
Tax Credit
Total
Tax In Company
Profits
Tax at 20%/18%
Available To Draw As Dividend
Combined Tax Paid
Overall Combined Rate Of Tax
Change in effective rate from now
2015/16
£
8,000
40,000
4,444
52,444
(10,600)
41,844
2016/17
£
8,000
40,000
48,000
(11,000)
37,000
2020/21
£
8,000
40,000
48,000
(11,000)
37,000
3,178
3,269
(4,444)
2,003
2,025
1,625
3,650
2,025
1,625
3,650
50,000
(10,000)
40,000
12,003
25.00%
50,000
(10,000)
40,000
13,650
28.44%
+3.44%
50,000
(9,000)
41,000
12,650
26.35%
+1.35%
Example 3
Basic salary of £18,000 with company profits of £12,500. The after tax profits of £10,000 withdrawn by way
of dividend.
Personal Tax
Salary
Net Dividends
Tax Credit
Personal Allowance
Taxable Income
Tax at 10%
Tax at 0%
Tax at 7.5%
Tax at 20%
Tax Credit
Total
Tax In Company
Profits
Tax at 20%/18%
Available To Draw As Dividend
Combined Tax Paid
Overall Combined Rate Of Tax
Change in effective rate from now
16
2015/16
£
18,000
10,000
1,111
29,111
(10,600)
18,511
2016/17
£
18,000
10,000
28,000
(11,000)
17,000
2020/21
£
18,000
10,000
28,000
(11,000)
17,000
1,111
1,480
(1,111)
1,480
375
1,400
1,775
375
1,400
1,775
12,500
(2,500)
10,000
3,980
14.21%
12,500
(2,500)
10,000
4,275
15.27%
+1.06%
12,500
(2,250)
10,250
4,025
14.38%
+0.17%
Example 4
Basic salary of £60,000 with company profits of £12,500. The after tax profits of £10,000 withdrawn by way
of dividend.
Personal Tax
Salary
Net Dividends
Tax Credit
Personal Allowance
Taxable Income
Tax at 0%
Tax at 7.5%
Tax at 20%
Tax at 32.5%
Tax at 40%
Tax Credit
Total
Tax In Company
Profits
Tax at 20%/18%
Available To Draw As Dividend
Combined Tax Paid
Overall Combined Rate Of Tax
Change in effective rate from now
2015/16
£
60,000
10,000
1,111
71,111
(10,600)
60,511
2016/17
£
60,000
10,000
70,000
(11,000)
59,000
2020/21
£
60,000
10,000
70,000
(11,000)
59,000
6,357
3,611
7,046
(1,111)
15,903
6,400
1,625
6,800
14,825
6,400
1,625
6,800
14,825
12,500
(2,500)
10,000
18,403
26.29%
12,500
(2,500)
10,000
17,325
24.75%
-1.54%
12,500
(2,250)
10,250
17,075
24.39%
-1.9%
Example 5
Basic salary of £60,000 with company profits of £43,750. The after tax profits of £35,000 withdrawn by way
of dividend.
Personal Tax
Salary
Net Dividends
Tax Credit
Personal Allowance
Taxable Income
Tax at 0%
Tax at 7.5%
Tax at 20%
Tax at 32.5%
Tax at 40%
Tax Credit
Total
Tax In Company
Profits
Tax at 20%/18%
Available To Draw As Dividend
Combined Tax Paid
Overall Combined Rate Of Tax
Change in effective rate from now
16
2015/16
£
60,000
35,000
3,889
98,889
(10,600)
88,289
2016/17
£
60,000
35,000
95,000
(11,000)
84,000
2020/21
£
60,000
35,000
95,000
(11,000)
84,000
6,357
12,639
7,046
(3,889)
22,153
6,400
9,750
6,800
22,950
6,400
9,750
6,800
22,950
43,750
(8,750)
35,000
30,903
32.53%
43,750
(8,750)
35,000
31,700
33.37%
+0.84%
43,750
(7,875)
35,875
30,825
32.45%
-0.08%
As can be seen from the above examples, whilst in most (but not all) cases there is a very small increase in
the overall rate of tax payable initially for 2015/16 to 2016/17, this falls far short of the 7.5% increase in tax
on dividends. For many there will be an overall reduction in rates from 2020 with the reduction in corporation
tax rates from 20% at present to 18%.
As mentioned above, this is due to the effect of the tax free dividend allowance, and the reduction in
corporation tax rates going forwards.
25 September 2015
www.davisons-uk.com
Disclaimer:
The contents of this factsheet are intended to inform, not offer specific advice on your individual circumstances. If you think the points covered may be to your benefit, please contact us for
further advice. We cannot accept any responsibility for any financial loss incurred as a result of reading and acting on this factsheet without receiving individual advice and our written
endorsement.
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