Dividend tax rise impacts business

08 April 2016

There are many single employee Personal Service Companies (PSCs) who pay themselves a low salary topped up by dividend income who will be feeling the impact of the reforms to dividend tax and also the possible loss of the Employment Allowance.

The dividend tax credit, which reduces the amount of tax paid on income from shares, has been replaced by a new £5,000 tax-free dividend allowance for all taxpayers from 6 April 2016. This simpler system will mean that only those with dividend income over £5000 per year, or those who are able to pay themselves dividends in place of wages, will pay more tax.

Under previous rules a 10% tax credit was applied to dividend income and businesses did not have to pay National Insurance Contributions (NICs). The new system abolishes this and now all payments above £5,000 will be subject to a new basic rate of 7.5%, in addition to the £11,000 personal allowance. Higher rate taxpayers will pay tax of 32.5% above earnings of £31,786, compared to 25% previously. Those above the additional rate threshold of £150,000 will see an increase from 31.6% to 38.1%.

The dividend allowance will apply to dividends received from UK resident and non-UK resident companies. For further information see Dividend allowance factsheet and Income Tax: changes to dividend taxation.

The changes to the Employment Allowance may also impact the same businesses. From 6 April 2016, limited companies where the director is the only employee paid earnings above the Secondary Threshold for Class 1 NICs will no longer be able to claim Employment Allowance. The guidance for single directors clarifies what action a company or their payroll providers should take where they may have lost eligibility.