CHARTERED CERTIFIED ACCOUNTANTS REGISTERED AUDITORS TAX AND BUSINESS ADVISORS

Date:

Treviot House, 186-192 High Road, Ilford, Essex, IG1 1LR

November 2015

Tel: 020 8477 0000

Fax: 020 8477 0001
email: info@davisgrant.co.uk
www.davisgrant.co.uk

FUNDAMENTAL CHANGES TO THE TAXATION OF DIVIDENDS

As part of his Budget speech held on, the Chancellor announced fundamental changes to the way in
which dividends are taxed for individuals.
We have reviewed the detail of the measures, which are due to take effect from 6 April 2016.
Consequently we would advise that that all shareholders of companies which yield dividends should take
stock of their affairs now, before this change takes place.
The current regime
Dividend income is currently taxable at various rates:

Basic rate taxpayers 10%, giving an effective rate of 0% after deducting the tax credit;
Higher rate taxpayers 32.5% (an effective rate of 25% on the net dividend);
Top rate taxpayers 37.5% (an effective rate of 30.6% on the net dividend).

However, the taxation of dividends has never been particularly straightforward. Net dividends, being the
amount of cash actually received, must be grossed up in order to ascertain the amount to be assessed to
tax for individual shareholders. Although this does lead to a tax credit which can later reduce the amount
of tax payable on the total dividends received, the calculation required to reach this point has traditionally
seemed onerous.
Despite this complexity, for owners of limited companies there are advantages to the availability of the tax
credit.
Under current rules it is possible for a company to pay a low salary to shareholder/directors which can
then be topped up by further payments by way of dividends, up to the basic rate band limit. The company
pays corporation tax on profits made at the relevant rate, but the application of the tax credit means that it
is possible that no further income tax is payable by the shareholders on extraction.
By way of example, during the current 2015/16 tax year, 39,206 can be paid to shareholders and
provided that they have no other sources of income, no further tax will be payable.
Savings are also possible for shareholders who receive dividend payments in excess of the basic rate
band. Their effective rates of tax on this form of income are 25% for higher rate tax payers, or 30.6% for
top rate taxpayers. This is opposed to 40% or 45% income tax, plus National Insurance Contributions on
higher salaries.
Appendix 1 of this letter contains a breakdown of the total corporation tax and income tax payable on
company profits of 50,000 and 100,000 in tax year 2015/16, where shareholders are paid using the low
salary/dividend extraction method.
What is changing?
With effect from 6 April 2016, dividends received up to the basic rate band limit will carry a 7.5% tax
charge. Higher rate dividends will now be taxed at 32.5% and a new 38.1% rate will apply to top rate
taxpayers.
Tax will be payable on the amount of dividends received, with no grossing up calculation required.
Conversely there will be no tax credit to deduct from the overall tax payable. The tax credit will be
replaced with a new allowance, which will apply to the first 5,000 of dividends received, per shareholder.
This allowance will be available in addition to the personal allowance, meaning that from 6 April 2016 it will
Directors: Barry G. Chernoff FCA FCCA Neil M. Driver FCA FCCA Jay Gandesha FCCA
Consultant: Lawrence P. Davis FCCA
M a n a g e r s Jenny Cessini FCCA Nadarajah (Bobby) Sivendra FCCA Steven Sandford FCCA Linda J. Stewart AICB Kathy Urwin FCCA
Registered as Auditors and regulated for a range of investment business activities by the Association of Chartered Certified Accountants
Davis Grant Limited is a limited company registered in England with registered number 07113456

AVN is an association of independent

accounts changing te numbers real
change for business owners wanting real
change

be possible to receive up to 16,000 in salary and dividends from a company before any income tax will
become payable.
However, beyond this amount, the new rate of 7.5% will become applicable. Using a typical scenario of
extraction by way of low salary combined with dividends received up to the basic rate band limit, (43,000
for 2016/17), income tax of 2,025 will become payable where historically this would be nil.
The new regime will also affect the amount of tax payable for higher and top rate taxpayers. Appendix 2
contains a breakdown the corporation tax and income tax payable in respect of net company profits of
50,000 and 100,000, using the low salary/dividend extraction method, with effect from 6 April 2016.
Salary v dividends comparison
Appendix 3 sets out a comparison of the overall taxation payable by a company earning profits of
100,000 in 2016/17. Appendix 4 shows what this comparison equates to for 2015/16. As you can see, a
combination of a small salary plus dividends still remains the most tax effective extraction method.
What are the next steps?
Any shareholder/director of a company will need to review their remuneration and extraction policies.
In addition, it may be worthwhile, where possible to bring forward the declaration of dividends during the
current tax year whilst the lower rates are still applicable. Even if the physical cash is not taken by the end
of the current tax year, once declared the dividend will provide the director/shareholder with a credit in the
company accounts. The cash can then be drawn later with no further tax becoming payable.

Finally, it is worth noting that over the coming tax years, the effect of this change will be mitigated
somewhat. It is proposed that the corporation tax rate will drop again to 19% from 1 April 2017 with a
further reduction to 18% scheduled to take effect from 1 April 2020.
Should you have any queries regarding the above, please do not hesitate to contact us.
Kind regards.
Davis Grant Ltd
ENCLOSURES:
APPENDICES

Appendix 1
Illustrative tax calculations
Tax year 2015/16

Profits before shareholder remuneration/dividends

50,000

100,000

Less: director's salary

Less: employer's NIC thereon

(8,000)
0

(8,000)
0

Company profits before tax

42,000

92,000

Corporation tax at 20%

(8,400)

(18,400)

Profits available for dividends

33,600

73,600

8,000
37,333

8,000
81,778

(10,600)

(10,600)

34,733

79,178

Director's personal tax position:

Salary
Gross dividends
Personal allowance
Taxable income
At 20% basic rate
At 10% dividend rate
At 32.5% dividend rate

Less: dividend tax credit

Tax payable

0
31,785
2,948

0
3,178.50
958.21

0
31,785
47,393

0
3,178.50
15,402.65

4,136.71

18,581.15

(3,473.30)

(7,917.80)

663.41

10,663.35

Appendix 2
Illustrative tax calculations
Tax year 2016/17

Profits before shareholder remuneration/dividends

Less: director's salary
Less: employer's NIC thereon

50,000
(8,000)
0

100,000
(8,000)
0

Company profits before tax

Corporation tax at 20%

42,000
(8,400)

92,000
(18,400)

Profits available for dividends

33,600

73,600

8,000
33,600

8,000
73,600

(11,000)

(11,000)

30,600

70,600

Director's personal tax position:

Salary
Gross dividends
Personal allowance
Taxable income
At 20% basic rate
5,000 dividend allowance
At 7.5% dividend rate
At 32.5% dividend rate
Tax payable

0
5,000
25,600
0

0.00
0.00
1,920.00
0.00
1,920.00

0
5,000
27,000
38,600

0.00
0.00
2,025.00
12,545.00
14,570.00

Appendix 3

2016-17
Salary only; no dividends

Dividend with small salary

Variables

Profit in company av ailable for remuneration

100,000

100,000

Salary /bonus

(88,857)

(8,112)

Employ er's NIC

(11,143)

Income Tax rates and allow ances

Personal allow ance

Company 's profits subject to corporation tax

91,888

Corporation tax

(18,378)

Profits av ailable to distribute as div idend

2016-17

Income limit for Personal Allow ance

11,000
100,000

basic rate threshold ("BRT")

32,000

basic rate

20.00%

higher rate threshold ("HRT")

150,000

higher rate

40.00%

additional rate

45.00%

73,510
Tax on UK div idends

Income tax and NIC thereon:

Salary
Div idend

88,857

8,112

Div idend allow ance

5,000

Div idend income at or below BRT

7.50%

73,510

(11,000)

(11,000)

Tax able income

77,857

70,622

20% basic rate

32,000

6,400

small CT rate (Small Profits Rate*)

20.00%

40% higher rate

45,857

18,343

full CT rate (from 1 April)

20.00%

27,000

2,025

second marginal CT rate

20.00%

38,622

12,552

small companies band (Marginal Relief Low er Limit)

N/A

24,743

65,622

14,577

second marginal band (Marginal Relief Upper Limit)

N/A

Less personal allow ance

Div idend income betw een BRT and 150k

32.50%

Div idend income ov er 150k

38.10%

Corporation Tax rates

7.5% div idend rate

32.5% div idend rate

Employee's NIC:

"Projected" Marginal Rate CT Pay able

12% on earnings betw een upper and low er limits

2% on earnings abov e upper limit

4,118

"Projected" Profit liable to CT

930

"Projected" CT Pay able

60,000

"Projected" Effectiv e Rate

20.00%

5,048
Total tax and NIC liabilities

National Insurance Contributions

Employ er's NIC

Corporation tax
PAYE
Employ ee's NIC

11,143

18,378

24,743

class 1 primary (Employ ees' primary Class 1 rate betw een primary threshold and upper earnings limit)12.00%
class 1 secondary (Employ ers' secondary Class 1 rate abov e secondary threshold)
class 1 low er limit (Primary threshold)

5,048

class 1 low er limit (Secondary threshold)

Higher rate tax on div idend

14,577
40,934

32,955

Cash in hand:
Salary

88,857

8,112

Div idend
PAYE

300,000

73,510
(24,743)

Employ ee's NIC

(5,048)

Higher rate tax on div idend

(14,577)
59,066
"C"

67,045
"E"

"Benefit" Dividend over Salary remuneration model ( "E" - "C" above):

7,979

13.80%
8,060
8,112

class 1 upper limit (Upper earnings limit, primary Class 1)

42,380

class 1 upper rate (Employ ees' primary Class 1 rate abov e upper earnings limit)

2.00%

2015-16

Appendix 4
Salary only; no dividends

Dividend with small salary

Variables

Profit in company av ailable for remuneration

100,000

100,000

Salary /bonus

(88,857)

(8,112)

Employ er's NIC

(11,143)

Income Tax rates and allow ances

Personal allow ance

Company 's profits subject to corporation tax

91,888

Corporation tax

(18,378)

Profits av ailable to distribute as div idend

2015-16

Income limit for Personal Allow ance

10,600
100,000

basic rate threshold ("BRT")

31,865

basic rate

20.00%

higher rate threshold ("HRT")

150,000

higher rate

40.00%

additional rate

45.00%

73,510
Tax on UK div idends

Income tax and NIC thereon:

Salary
Div idend (73,510 x (100/90))

Div idend allow ance

88,857

8,112

Div idend income at or below BRT

10.00%

Div idend income betw een BRT and 150k

32.50%

Div idend income ov er 150k

37.50%

81,678

(10,600)

(10,600)

Tax able income

78,257

79,190

20% basic rate

31,865

6,373

small CT rate (Small Profits Rate*)

20.00%

40% higher rate

46,392

18,557

full CT rate (from 1 April)

20.00%

31,865

3,187

second marginal CT rate

20.00%

47,325

15,381

small companies band (Marginal Relief Low er Limit)

N/A

24,930

79,190

18,567

second marginal band (Marginal Relief Upper Limit)

N/A

Less personal allow ance

Corporation Tax rates

10% div idend rate

32.5% div idend rate

Employee's NIC:

"Projected" Marginal Rate CT Pay able

12% on earnings betw een upper and low er limits

2% on earnings abov e upper limit

4,118

"Projected" Profit liable to CT

930

"Projected" CT Pay able

60,000

"Projected" Effectiv e Rate

20.00%

5,048
Total tax and NIC liabilities

National Insurance Contributions

Employ er's NIC

Corporation tax
PAYE
Employ ee's NIC

11,143

18,378

24,930

class 1 primary (Employ ees' primary Class 1 rate betw een primary threshold and upper earnings limit)12.00%
class 1 secondary (Employ ers' secondary Class 1 rate abov e secondary threshold)
class 1 low er limit (Primary threshold)

5,048

class 1 low er limit (Secondary threshold)

Higher rate tax on div idend

18,567

Less tax credit

7,919
41,121

29,026

Cash in hand:
Salary

88,857

8,112

Div idend
PAYE

300,000

73,510
(24,930)

Employ ee's NIC

(5,048)

Higher rate tax on div idend (less tax credit)

(10,648)
58,879
"C"

70,974
"E"

"Benefit" Dividend over Salary remuneration model ( "E" - "C" above):

12,095

13.80%
8,060
8,112

class 1 upper limit (Upper earnings limit, primary Class 1)

42,380

class 1 upper rate (Employ ees' primary Class 1 rate abov e upper earnings limit)

2.00%