It seems like the tax break hits just keep coming. As of April of this year, a significant reduction has been made to a previous tax relief for owners or directors of limited companies that get paid via dividends. The tax-free dividend allowance has plummeted to just £2,000, a 60% drop from the £5,000 previously afforded. So now any dividends you receive over this threshold will be taxed at your marginal rate.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
New dividend tax rates
How much extra tax will you be paying now the threshold has reduced?
- Basic rate taxpayers earning £11,850 to £46,350 a year will pay a tax rate on dividends of 7.5%, resulting in an extra £225 paid in tax.
- Higher rate taxpayers who earn between £46,350 and £150,000 will be taxed on dividends at a rate of 32.5%, which means you’ll pay an additional £975.
- Additional rate taxpayers, or those earning more than £150,000, will be subject to a 38.1% tax rate and will hand over a further £1,143 to HMRC.
To update your tax code, you will need to complete a self-assessment tax return if your dividends are over £10,000. If your dividends are between £2,000 and £10,000, you can also complete a self-assessment tax return but you could also apply to HMRC for a code alteration.
But dividend taxes are just one of many types of taxes that limited companies need to deal with and the number and types to contend with will vary.
Besides the Capital Gains Tax, Entrepreneurs Relief, and staff duty, the most common taxes are detailed below.
Corporation Tax
Corporation tax is levied against a limited company’s profits which includes not only what is earned from the operation of the business (trading profits) but also any investments in the business’ name and any excess earned from the sale of an asset (chargeable gains).
As of the 2018/19 tax year, corporation tax sits at 19%, but the government has plans to reduce this to 17% in two years.
National Insurance
National Insurance Contributions are collected from employee salaries and paid to the government by employers. There are various classes that dictate how much is paid based on employment status and earnings. Those in class 1 and 1A/1B will have everything taken care of by the employer while those in class 2 (those self-employed) will either not have to pay or only need to make voluntary contributions, depending on which class they fall into.
There is a bright spot for National Insurance Contributions – under the Employment Allowance tax incentive, if your company qualifies, you may be able to write off the first £3,000 of contributions.
Income Tax
The personal allowance for income that you can earn tax free for the 2018/19 tax year is £11,580 – beyond this you are required to pay income tax on your earnings. As with dividends, your tax band depends on exactly how much you are bringing in. The basic rate is 20%, the higher income tax rate is 40%, and if your income is £150,000 or more, the rate is 45%.
If you own your own limited company, you may choose to take only a small salary and make up the difference with dividends. Unfortunately, with the recent tax developments, more thought might need to be put into the distribution of how you receive your income.
As a director or owner of a limited company, there are a whole host of tax implications to consider – income tax, national insurance contributions, corporation tax, and dividend tax.
There is even more to think about with the newly reduced dividends relief since you’ll need to re-evaluate the distribution of how you receive a salary and dividends to maximise your take home.
Want to build & protect your wealth?
Investments | Financial Planning | Retirement | Save Tax | Protection |
Dental & Medical Financial Services have been helping doctors and dentists to build and protect their wealth, whilst saving tax for over 25 years.