As we are coming up to the end of the tax year, it is important to maximise unused tax allowances as detailed in our previous blog, especially with the impending dividend tax changes from 6th April 2016 onwards.
In the current 2015/16 tax year, dividends received when your gross income is below the higher rate threshold of £42,385 are free of tax. This equates to total net dividends of £28,606 that you are able to receive free of tax in the current tax year based on a salary received of £10,600. Regardless of your expected future earnings, it would be beneficial to declare dividends up to the higher rate threshold if you haven’t done so already to utilise this tax-free band provided that the reserves are available in the company.
If you expect your gross personal income to exceed the higher rate threshold in future tax years, it would be beneficial to declare a higher proportion of dividends above the higher rate in 2015/16 to exploit the lower tax rates. Dividends declared above the higher rate threshold are currently taxed at 25% on your self assessment tax return, however this is increasing to 32.5% from 2016/17 onwards. Provided that the reserves are available in the company at the time of declaration, you can declare a dividend even in the funds aren’t currently available in the business account. This is important to consider to ensure maximum tax efficiency is obtained at the end of the tax year.
There are certain factors to be aware of if a higher proportion of dividends are declared in 2015/16:
- Student loan repayments are required to be made when your gross personal income exceeds £17,335 (£21,000 for those who started studying on or after 1st September 2012). You will repay 9% of any amount earned over this threshold, and this will be calculated and paid on your self assessment tax return.
- The High Income Child Benefit Tax Charge applies when your gross income exceeds £50,000. For every £100 that this threshold is exceeded by, 1% of any child benefit received is repayable. If your gross personal income reaches £60,000, 100% of the child benefit received in that tax year will be repayable on your tax return.
- If your gross income reaches £100,000, you will begin to lose your personal allowance. For every £2 earned over this limit, you will lose £1 of your personal allowance. If your income exceeds £121,200, you will lose your full personal allowance. We would advise against declaring dividends above this threshold unless you see your personal income exceeding this threshold in future tax years also.
- Declaring a large amount of dividends above the higher rate threshold in 2015/16 will cause there to be a larger self assessment tax bill, due to be paid by 31st January 2017. If this liability exceeds £1,000 there will also be payments on account due for 2016/17, payable on 31st January 2017 and 31st July 2017. Payments on account are calculated on the assumption that you will have a similar tax bill in the next tax year, and each payment on account is half of your total personal liability for 2015/16. For example:
- 2015/16 Self Assessment Tax Liability £3,000 due to be paid by 31/01/17
- 2016/17 1st Payment on Account £1,500 due to be paid by 31/01/17
- 2016/17 2nd Payment on Account £1,500 due to be paid by 31/07/17
- These payments on account would be offset against your total tax liability for 2016/17 when your self assessment has been completed for that year. You would have to ensure that you have the cash available to make these payments as and when they become due.
- If you require an income assessment for things like child benefit and university funding, this should be considered due to the large proportion of dividends that you would receive in a single tax year.
Here at Gorilla, our specialist contractor accountants will provide you with unlimited support for all your tax related queries and you’ll even get a same day response if you contact us before 3pm under our client guarantee service. In addition, your personal tax return is included within our all-inclusive package for just £85 + VAT per month! If you’re interested in a FREE trial of our online bookkeeping software, do not hesitate to contact us on 0330 024 0406.
