Hi all, Andrew Potts from KP Simpson certified public accountant here to talk to you about the important financial stories.
As the start of a new tax year approaches, a major change that was announced back in July 2015 is set to kick in.
And although it was almost a year since the announcement of the changes to the dividend tax scheme, it is not too late to get a hold on the new rules set to be unveiled in April which will see tax hikes for the majority of limited company owners.
The Chancellor revealed the new dividend tax scheme, designed to raise an estimated £2.54 billion for the treasury last summer. But what exactly are these changes and what do they mean for you?
At current, (March 2016) basic rate tax payers pay zero tax on dividend income. Those in the higher rate pay 25% with additional rate tax payers paying 30.56%. No matter the tax band someone may find themselves in, because dividends are already affected by corporation tax, they will pay less than that of an earned income.
This new system came about to eliminate what George Osborne termed “tax motivated incorporation” – or people paying a lower salary and almost using dividends as a main income in order to pay less tax.
The new system will remove the current dividend tax credit and will see a new tax-free allowance of £5,000 a year on dividends for all taxpayers.
The £5,000 allowance however would sit within the relevant tax band.
So let’s take a look at a taxpayer on £8,060 a year and let’s say they have £80,000 of dividends.
The salary and dividends which take them up to the personal allowance (£2,940) are tax free. The next £5,000 of dividends are also tax free, however the rest of the dividend is taxed as such: £27,000 at 7.5% basic rate (£2,025), £45,060 taxed at higher rate (32.5%) equating to £14,644.50 giving total taxed amount of £16,669.50.
Overall that means a tax rise of £4,392.62 for our taxpaying friend over the current system. When you put it in figures you can see why many see it as a double taxation.
As always, if you need any advice on taxes, savings or anything financial give us at KP Simpson a call on 0191 420 0550 or visit us online at www.kpsimpson.co.uk.
