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Hints & Tips

Lymm Village

Tax Hints and Tips

Lymm Village

Free hints and tips about tax and accountancy from Lymm Tax

Increase in tax for owners of companies

Do you have your own company through which you run your business?

Are you aware that from 5 April 2016 your tax bill is likely to increase?

If you usually take dividends of more than £5,000 per year out of your company and are a basic rate taxpayer you will find yourself paying tax on those dividends whereas currently basic rate taxpayers do not pay tax in their dividends on the grounds that the company has already paid 20% tax on the profits out of which the dividends are paid.

From 6 April 2016 basic rate taxpayers will pay tax at 7.5% on their dividends to the extent that those dividends exceed £5,000. So most company owners are going to be paying more tax as a result of this measure.

Higher rate taxpayers already pay personal tax on their dividend income, in addition to the tax paid by their company. Because of changes in the way the taxable amount of dividends is calculated, some higher rate taxpayers will find themselves better off after April. Others will find themselves paying more tax because the effective rate of tax on dividends for them is increasing too from 25% to 32.5%.

Higher rate taxpayers for whom dividends are not a major part of their income eg those with employment/pension/property/sole trading income and a modest portfolio of quoted securities will probably find themselves better off under the new rules because of the £5,000 exemption.

There will be winners and losers under the news rules depending on personal circumstances. People are advised to check their own situation with their accountant, in particular to see if any action can be taken to reduce the adverse effects of these changes.