Dividend Tax - Frequently Asked Questions
Government legislation that will take effect from 6th April 2016, therefore affecting the 2016-17 tax year onwards.
What are the changes?
From 6th April 2016, an existing 10% notional tax credit on dividends will be removed for all limited companies. Instead companies will be entitled to an annual £5,000 tax free allowance and all other dividend income will be taxable.
Three new dividend tax bands will be created based on the recipient’s income tax band, and will apply to all dividend income in excess of £5,000 per year. The bands are as follows: 7.5% (basic rate); 32.5% (higher rate); 38.1% (additional rate).
Who will be affected by the changes?
The new legislation applies all UK limited companies. This includes contractors who use their own limited company (referred to as PSCs) to contract with agencies and/or end clients and then pay themselves via a combination of salary and dividends.
When are the changes coming into force?
The changes take effect from 6th April 2016.
What does this mean for me?
If you operate a PSC and pay yourself more than £5,000 in dividends during a tax year, you will pay a higher rate of tax on those dividends after 6th April. The amount of increased tax will depend on the size of the dividend payment and any other income that you have.
The amount that ARM pays your limited company for the services you are providing to end clients will not change; it is simply your tax burden that may increase.
Should I change my payment vehicle in the light of these changes?
Please speak to your accountant about your particular circumstances in order decide the best approach for you going forward. If you do decide to make changes to the way you supply your services to us, please let us know as soon as possible.