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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,


Ian Hart Signature - Financial Advisor

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