For many years now business owners with Ltd Companies have been able to extract profits from the company using dividends rather than additional salary. This has proved to be very tax efficient to date. However from April 2016 these tax breaks are due to come to an end.
The income tax on dividends will increase by 7.5% from 6 April 2016. This means that if you are paying tax at the basic rate, then at the moment your dividend income is tax free, but from April, if you take more than £5000 in dividends during the year then you will have to pay 7.5% tax on it.
For Higher Rate and Additional Rate taxpayers the rates are 32.5% and 38.1% respectively.
So if you currently have a limited company I would advise talking to your accountant to take advantage of the lower rates now and declare additional dividends before 6 April 2016.
Now is the time to compare salary versus dividend to ensure you are getting the best remuneration package with the most tax efficient costs.
However it’s not all bad news because there is the flip side for those holding shares as an investment as the first £5000 of dividends will be tax free.