Michael Lansdell from Lansdell & Rose Chartered Accountants talks this month about how the new dividend rules could affect doctors and dentists.
Following the Second Budget in July 2015, the Chancellor announced changes to the dividend taxation system that will invariably affect many doctors and dentists from April 2016, particularly those drawing dividends from their own limited company. Understand the changes so you can be prepared and consider your options.
The views expressed in this article are specifically those of Lansdell & Rose Accountants.
Simplification but not very business friendly
George Osborne’s intention with the dividend reform is to overhaul what is now a fairly complex system for taxing dividends. However, it has also been commented on as being quite “anti-business” as a large number of business professionals are going to be subject to paying higher levels of tax as a consequence.
The current dividend set up
Dividends are income received from holding shares. This could be as part of a Stocks and Shares ISA, a personal pension, a unit trust or share investments.
Alternatively though, dividends can be generated as remuneration for a director / shareholder of a limited company, a business structure of which is common for many doctors and dentists.
Currently, dividends from UK shares are paid along with a 10% tax credit, accounting for the fact that the limited company has already paid tax on it’s profits under corporation tax.
Effectively, a £1,000 net dividend becomes £1,111 for personal tax calculations, by taking the £1,000 net dividend received, dividing it by 90 and multiplying by 100.
A basic rate tax payer would have no tax to pay on these dividends although higher-rate and top-rate tax payers still do.
The new dividend set up
From April 2016, the tax credit system is to be abolished and replaced with a system similar to income tax, where all dividend income will be treated as untaxed when received and for the purpose of completing the annual tax return.
There is to be a £5,000 tax free allowance, however dividend income above this level will be subject to tax.
How much tax exactly depends on your overall taxable income from all sources, but the bottom line is there will be a 7.5% increase in tax on dividend income in excess of £5,000.
Tax band | Current dividend tax rate | Current effective dividend tax rate (with tax credit) | Dividend tax rate after April 2016 |
---|---|---|---|
Basic rate | 10% | 0% | 7.5% |
Higher rate | 32.5% | 25% | 32.5% |
Top rate | 37.5% | 30.56% | 38.6% |
What about dividends under £5,000?
For dividends received up to the value of £5,000, there will be no tax implication for a basic rate tax payer. The tax will remain at zero.
Those higher-rate or top-rate tax payers, receiving dividends of under £5,000 will actually receive a tax saving. On a £5,000 dividend, a higher-rate tax payer will save £1,250 and a top-rate tax payer will save £1,530.
Lansdell & Rose are specialist medical and dental accountants with a key focus on tax planning for healthcare professionals.
Contact Michael today for bespoke tax advice
What about tax on ISA’s and pensions?
Dividend income received on Stocks and Shares ISA’s as well as private pensions are protected as a tax-sheltered investment, following regulations introduced by Gordon Brown in 1997.
Therefore if your investment is in either an ISA or pension wrapper there will be no tax consequences for you in conjunction with the dividend tax reform next year.
Winners and losers – what can be done?
So clearly there are to be some winners and some losers when the dividend reform comes into force next year.
Unfortunately, many dentists and doctors are more likely to be subject to additional tax than tax savings. Whilst it will still be financially beneficial taking drawings as dividends compared to taking a salary and paying income tax, some of the advantages of the lower rate tax on dividends will be lost in this reform.
Anyone planning to start a new limited company would be wise to speak with a professional accountant in advance, to crunch the numbers and ensure it is viable.
As a final note, there is still until April 2016 where current tax rates apply, so there may be an opportunity to maximise dividend drawings in this financial year before the system changes.
Also, the use of tax-sheltered investment vehicles such as ISA’s could become even more essential in future tax years as well as maximising all other allowances for you and your spouse.
Read more from Michael
– 5 tax savvy tips to minimise tax
– Auto-enrolment pension update
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