The Government has just announced further changes to the dividend tax system during the budget that will impact all limited company Directors who pay themselves via a combination of salary topped up with dividends. Paying a low salary to a director from a limited company and then paying dividends afterwards if a popular method of reducing income tax and in particular National Insurance charges but this due to get bit more expensive.
There have been a number of changes to the dividend tax system with the scrapping of the dividend tax credit and the introduction of new dividend tax rates. Yesterday’s budget announcement means that things are set to change yet again.
What are the changes?
The main headline change announced was a reduction in the tax-free dividend allowance from the current amount of £5,000 down to £2,000. This is a significant decrease and will result in more tax being paid by the owners of limited companies and will impact a number of small businesses across the UK.
The reduction will come into effect during April 2018.
The increased cost to a basic rate taxpayer is expected to be £225 per annum.
Why is the change being introduced?
The current Government has made changes to bring the tax paid by director-shareholders closer to, or more in line with, the tax paid by regular employees.
What should I do about this?
The impending change to the tax-free dividend allowance raises the prospect of maximising the use of the current year’s tax free allowance rather than leaving profits within a limited company.
The change doesn’t alter the current strategies for minimising tax on income extracted from a limited company as there are still significant gains with regards to reduced National Insurance payments when receiving dividends.
As with all changes to the tax system more detailed guidance will be released closer to the time of implementation and we will endeavour to update the blog to reflect this as and when needed.