April 2016 will see a significant change to the taxation of dividend income.
The changes are aimed at reducing the perceived tax planning advantage gained when businesses are incorporated and profits extracted in the main by way of dividends.
The new proposal are:
- to introduce a tax-free annual Dividend Allowance of £5,000
- to abolish the dividend tax credit
- to amend the tax rates on dividends to 7.5%, 32.5% and 38.1%.
Previously basic rate taxpayers paid 0% tax on dividends until the point at which they became a higher rate taxpayer. Therefore, these taxpayers will be the most affected by the changes.
It is not all bad news:
- dividends do not incur a National Insurance liability
- a company owned jointly by a husband and wife could potentially benefit from £10,000 tax-free dividends from April 2016
- the rate of corporation tax is set to fall to 18% in 2020. Significantly cheaper than self-employed income tax and class 4 National Insurance
www.doctorstax.co.uk – Accountants for doctors
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