Dividend tax 2018/2019

Dividend tax 2018/2019 and everything you need to know about it.

Shareholding directors receive dividends on the profit their companies make. It’s a straight payment from the company to the director after corporation tax considerations.

However, dividends have lost a lot of their shine since 2016.

Before then, it was mad not to pay yourself in dividends. You could draw up to £31,785 in dividends on top of your optimised salary level and only pay 10% on it. However, you didn’t pay 10% on it because you receive a 10% tax credit back, essentially cancelling all dividend taxes out for basic rate taxpayers.

Additional rate taxpayers, those receiving £150,000 or above, would only pay an effective rate of 30.55% on their dividend payments.

For most entrepreneurs, the tax advantage to paying yourself as a limited company shareholding director was clear over doing business as a sole trader or a partnership.

But, as most parties do, this came to an end.

 

Dividend tax 2016/2017 and dividend tax 2017/2018

The old system was jettisoned in 2016. No more 10% tax credit.

Instead, it was replaced by a £5,000 allowance, at and under which you’d pay no taxes on your dividend payments.

If you are a basic rate tax payer, you paid 7.5% on your dividends above the allowance. For higher rate tax payers, the rate was 32.5% and for additional rate tax payers, 38.1%.

 

Dividend tax 2018/2019

At the last Autumn Statement, there was no indication given by the Chancellor about the personal allowance and tax band levels for 2018/2019. This is a break for the norm so we’re a little worried about what may be coming.

One thing we do know is that the dividend allowance is reducing from £5,000 to £2,000 from 6th April 2018.

This means that, for a yearly dividend of £10,000:

  • basic tax rate payers will pay an additional £225,
  • higher rate tax payers have to find £975 more, and
  • £1,143 is in the increase in the bill for additional rate payers.

 

Is this the beginning of the end for the salary dividend split?

Ever since the changes in the tax system came into effect in 2016, the benefits of paying yourself a mixture of salary and dividends as opposed to just salary have become a lot harder to see.

£70,000 £100,000 £125,000 £150,000 £175,000 £200,000 £300,000
Sole trader £49,335.56 £66,736.56 £75,679.68 £90,179.68 £103,429.68 £117,636.56 £170,636.56
Shareholding director £51,389.64 £67,589.64 £80,824.31 £90,139.26 £103,331.64 £116,180.20 £165,700.20
WINNER Incorporated Incorporated Incorporated Unincorporated Unincorporated Unincorporated Unincorporated
Better off by £2,054.08 £853.08 £5,144.63 £40.42 £98.04 £1,456.36 £4,936.36

 

This table compares the money left if you’d paid income tax and national insurance as a sole trader and the money left after corporation tax to pay yourself a salary of £8,164 and dividends of the entire profits of your business.

Now, there’ll always be a healthy debate about the benefits of being a sole trader versus the benefits of being a shareholding limited company director.

However, what this table clearly demonstrates is that payment by salary and dividends works better up to around £150,000 but after that the tax a sole trader faces is less, albeit not by much.

 

What’s best for you?

Tax laws and systems have changed more in the last 5-10 years for companies and individuals than in arguably the 50 years that went before it. To make sense of it all for you, call Smart Team on 01202 577500 or email us at [email protected].

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