Taxation of Dividends presentation by Damian Connolly FCCA, Founder & MD of Sakura. From the Sakura Business Clinic on Friday the 15th of April 2016.

3. Background: Salary or Dividends?
• Salary for directors allows an entitlement to UK state pension
• Dividends avoid Employer’s national insurance
• Until end of 2015/16 dividends came with an attached 10% tax
credit
• Dividends received of £10k consisted of a ‘gross amount’ of £11,111
plus a tax credit of £1,111
• NOTE – dividends paid from ‘after tax’ company profits

4. From 2016/17, much of the existing structure
in place around dividends tax is changing!
Director/shareholders of SMEs, in particular, will
pay more tax than they have had to historically.

5. What Are the Key Changes Being Implemented from
April 2016 Onwards?
• 10% tax credit on dividends has been abolished
• New dividend allowance is introduced for first £5,000 of dividends per
annum for all taxpayers
• No tax deducted at source with any tax paid via Self Assessment
• Dividends are always treated as ‘top slice’ of income i.e. other income will
always use the Personal allowance and basic rate threshold first.
• Tax on dividends now as follows
– NIL on first £5,000 of dividends
– 7.5% on taxable dividends within the basic rate threshold
– 32.5% on dividends within the higher rate threshold
– 38.1% on dividends above the additional rate threshold

6. How Does This Compare with the Current
Approach ?
• Under the current system there is no tax on dividends for basic-rate
taxpayers i.e. tax is covered by the attached 10% tax credit.
• The current system takes into account that Corporation tax has already
been paid on amounts taken out as dividends
• All taxpayers currently pay less on dividends than from 2016/17 onwards,
once the £5,000 allowance is exceeded
• From 2016/17 the overall tax take from limited company structures will
increase

7. Individuals who receive dividends in excess of the £5,000 annual allowance
and basic rate taxpayers will be required to pay tax and submit a Self
Assessment return from 2016/17
Founder/Shareholders of limited companies will be paying more tax from
2016/17, even where total earnings are unchanged year on year
However - a mix of salary and dividends as a remuneration for such founders
is still significantly more tax efficient than salary alone.

8. Year on Year Comparisons
ALLOWANCES & THRESHOLDS 2015/16 2016/17
Personal Tax Allowance 10,600 11,000
Dividends Allowance Nil 5,000
Basic rate Threshold 31,785 32,000
Higher Rate Threshold 31,786 32,001
Additional Rate Treshold 150,001 150,001
• Simple examples to illustrate calculation of tax on dividends from 2016/17
onwards
• Generally ignore Savings Allowance and Income tax on other income to focus on
dividend issues
• Aim to highlight key issues and anomalies

9. TAX RATES 2015/16 2015/16
Dividends Tax
2016/17 2016/17
Dividends Tax
Basic rate 20% 10% (Nil) 20% 7.5%
Higher Rate 40% 32.5% (25%) 40% 32.5%
Additional Rate 45% 37.5%(30.6%) 45% 38.1%

10. Dividends Received of £5,000 or less
• No tax due

11. Total Income Received of £ 11,000 or less
• No tax due as income is covered by personal allowance
• Dividend allowance is effectively unused

12. Total Income Received 2016/17 of £18,500, including Dividends of
£12,000
BR Taxpayer Income PA BR Band
Non-dividend
income
6,500 6,500
Dividend 12,000 4,500 7,500
Total 18,500 11,000 7,500
Less DA (5,000)
Taxed at 7.5% 2,500
Tax Due - Dividends £187.50

13. Total Income Received 2016/17 of £26,000, including Dividends of
£6,000
BR Taxpayer Income PA BR Band
Non-dividend
income
20,000 11,000 9,000
Dividend 6,000 6,000
Totals 26,000 11,000 15,000
Tax on dividend
Dividend in basic
rate band
6,000
Less DA (5,000)
Taxed at 7.5% 1,000
Tax Due - Dividends £75.00

14. Total Income Received 2016/17 of £40,000, including Dividends of
£22,000
BR Taxpayer Income PA BR band
Non-dividend income 18,000 11,000 7,000
Dividend 22,000 22,000
Totals 40,000 11,000 29,000
Tax on dividend
Dividend in basic rate
band
22,000
Less DA (5,000)
Taxed at 7.5% 17,000
Tax Due - Dividends £1,275.00

15. Total Income Received 2016/17 of £49,000 including Dividends
of £9,000 **
HR Taxpayer Income PA BR band HR band
Non-dividend income 40,000 11,000 29,000
Dividend 9,000 3,000 6,000
Totals 49,000 11,000 32,000 6,000
Tax on Dividends
Dividend in BR/HR 3,000 6,000
Less DA (3,000) (2,000)
Taxed at 7.5% / 32.5% NIL 4,000
Tax Due - Dividends - £1,300

16. SME business owners tend to take large dividends and have
minimal ‘other income’ !
Hence dividend tax changes have significant impact !
EXAMPLE - Director receives a salary of £8,000 and a dividend
of £50,000. The following examples illustrate how much tax he
or she will pay under the new compared to the old rules:

17. Comparing old rules Tax paid
Company profit before salary and tax £70,500
Salary £11,000 (covered by personal allowance)
Company profit after salary £59,500 11,900
Dividend paid of £47,600 (£52,888)grossed up)
£32,000 @ 10% 3,200
£20,888 @ 32.5% 6,788
Less tax credit (5,288)
Total tax payable (old rules) £16,600
New Rules 2016/2017 Tax paid
Company profit before salary and tax £70,500
Salary £8,000
Company profit after salary £62,500 12,500
Dividend paid of £50,000, taxed as:
£3,000 – Covered by balance of personal
allowance
£5,000 @ 0%
£27,000 @ 7.5% 2,025
£15,000 @ 32.5% 4,875
Total tax payable (new rules) £19,400
Increased tax payable following the changes for 2016/17: £2,800

18. 5 Tips to Minimise the Effects of the
changes in taxation of Dividends
1. Use your annual Tax-free Dividend and Income Tax
allowance
2. Move shareholdings into ISAs
3. Move shareholdings to your Spouse
4. Reduce other (non dividend) income
5. Use pension contributions

19. Other Practical Issues & Final Comments
• Impact felt by taxpayers only after April 2017 !
• Dividend income less than £5,000 per annum, a tax saving made for higher
rate taxpayers in 2016/17 i.e. between higher rate and 10% tax credit
• Dividend income above £5,000 per annum, all taxpayers pay more tax in
2016/17
• In receipt of dividends and not submitting a Self Assessment return ?
Check carefully !
• Ensure that you are saving funds to pay tax sooner rather than later !

20. Other Practical Issues & Final Comments
• Be careful! HMRC issuing new tax codes taking previous
dividend incomes into account
• HMRC aim is to reduce tax allowance so that ‘tax’ is paid
throughout 2016/17 ahead of the Self Assessment payment
dates
• Contact HMRC to have this removed and reinstated back to
the standard tax code
• Potential further changes in the pipeline from April 2017

23. T: 0207 952 1230
E: damian@sakurabusiness.co.uk