Corporate
Dividend
Strategy
From
April
2016
the
way
dividends
are
going
to
be
taxed
is
to
change.
You
will
be
given
a
new
£5,000
dividend
allowance.
However,
dividends
above
that
amount
will
be
subject
to
an
tax
increase
of
7.5%.
If
you
pay
yourself
a
small
salary
e.g.
£8,000
and
the
rest
in
dividends
you
will
pay
more
tax
if
you
pay
yourself
more
than
£5,000
in
dividends.
You
could
increase
the
amount
of
salary
you
pay
yourself.
But,
the
company
would
then
be
subject
to
13.8%
National
Insurance
Contributions
(NIC).
You
would
also
have
to
pay
NIC
of
12%
between
£8,112
and
£34,324
and
2%
above.
Therefore,
it
is
still
more
tax
efficient
to
receive
dividends
rather
than
a
salary.
If
your
aim
is
to
extract
profits
from
your
company
then
making
a
pension
contribution
is
the
most
tax
efficient
way.
As
pension
contributions
should
pass
the
‘wholly
and
exclusively’
test
there
would
be
no
tax
to
pay
at
all
in
extracting
profits
from
the
company.
You
would
probably
only
pay
15%
tax
when
you
withdrew
the
cash
on
retirement
(see
http://www.ufa-tf.co.uk/newsletter/do-you-want-to-minimise-corporation-tax.html.
The
way
the
dividend
allowance
is
applied
is a
little
confusing.
The
example
below
will
hopefully
try
to
clarify
the
calculations.
Let’s
assume
you
receive
a
basic
salary
of
£8,000
and
£92,000
in
dividends:
The
personal
allowance
is
£11,000
Income
0 -
£8000
Tax
Rate:
0%
Income
£8,001
-
£11,000
Tax
Rate:
0%
Dividend
allowance
of
£5,000
Income
£11,001
-
£16,000
Tax
Rate:
0%
High
rate
threshold
of
£43,000
Income
£16,001
-
£43,000
Tax
Rate:
7.50%
Income
£43,001
-
£100,000
Tax
Rate:
32.50%
Now
that
everyone
has
a
£5,000
dividend
allowance
it
might
be
worthwhile
reviewing
your
corporate
shareholding.
If
you
are
a
high
rate
tax
payer
you
could
transfer
a
small
percentage
to
your
spouse
if
they
were
a
basic
rate
taxpayer
to
utilise
their
allowance.
Finally,
if
you
cannot
top
up
your
pension
as
you
have
used
up
all
your
allowances
then
you
could
look
at
bringing
forward
any
retained
profits
into
the
2015-16
tax
year.
Kind regards,
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