From 6th April this year any dividends received over £5,000 are taxable but there is no tax deduction at source as there was previously.
Every time a business owner takes a dividend from their company they are building up an unseen tax burden which will land on January 2018. If you have been in the basic rate band this could be the first time you have had to find money for tax in January. As a higher rate payer you’ll see a big increase in the amount you need to find.
It’s easy to carry on without making plans for this but dangerous! How will you cope when presented with a tax bill in the thousands that you are expected to meet without fail or risk penalties and interest making the situation even worse?
Act now and plan to set aside the tax which is building up.
It is important you calculate your tax as you go.
Dividends in excess of £5,000 are taxed at 7.5% whilst the total income remains below the higher rate threshold of £43,000 (2016/17). Owner managers with no other sources of income are likely to have an extraction strategy as below
Salary - £8,000 NIL
Dividends within personal allowance - £3,000 NIL
Dividends within £5,000 tax free allowance NIL
Dividends in remaining basic rate band - £27,000 £2,025
Once salary and dividends exceed £16,000 the tax kicks in. From this point you should calculate 7.5% on everything you declare as dividend until you hit £43,000.
Dividend rate in the higher rate band increases to 32.5% so that every £1,000 incurs tax of £325 ramping up your tax bill even quicker.
BusinesHeads clients who use our dividend declaration service are receiving a note of the tax they are accruing and our advice is, unless you have spare cash and profits, take additional dividends and draw amounts to cover the tax well in advance of the payment date.
To avoid spending this tax money put it away in an ISA or other savings account to accrue some interest. And guess what? The good news is that there is a tax free savings allowance of £1,000 for basic rate tax payers and £500 for higher rate so no tax due on your tax money! Phew!
Talk to us about your tax bill to be sure you’re not paying more than you should, and when the payment day dawns you’re not caught out.
I’ve been working with owner managers for over 20 years helping them to build sustainable businesses and pay the right amount of tax. Change and uncertainty are part of business life, but with our support we’ll help you navigate a safer path to success. Call Carole Jordan on 01273 882200 so we can discuss what we can do for your business.
All details above were correct at the time of publishing - for more up to date information please
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