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.