Tax is changing on 6th April 2016, and that means that you will need to ensure you are ready for these changing, otherwise you run the risk of falling foul of HMRC, which risks, at the very least, a hefty fine.
So what’s happening? Well, these changes are particularly relevant if you receive any part of your income through your company’s dividends. The current regime is about to be completed overhauled since the government – and no doubt many accountants too – found it complex and confusing.
The only problem with making it all simpler is that it will also cost the majority of company owners more. Since George Osborne believes that many company owners use dividends rather than a salary as it saves tax, he has raised the tax levels on those same dividends in an effort to pull back some of the so-called lost money. Estimates say that the new rules will raise just over £2.5 billion during 2016 to 2017.
Currently, gross dividends are taxed at 10% for the basic rate, 32.5% for the higher rate, and 37.5% for the additional rate. After this, once tax credit is calculated, there are no extra payments required for amounts that fall into the basic tax bracket, and an 25% for the higher rate and 30.56% for the additional band. That means it’s currently – until April 2016 – possible to earn as much as £42,385 through dividends without having to pay any income tax.
As of next month, however, everything is changing. Once the tax allowance is calculated (this will be £11,000 maximum), those being paid via dividends will be allowed £5,000 of dividend income tax free. That means that on an income of up to £16,000 you won’t have to pay any tax.
After this, the rates will be 7.5% for basic, 32.5% for higher, and 38.1% for additional. So although the basic rate of tax has actually reduced (and the higher has remained the same whilst the additional rate has increased slightly), those paid with dividends will still end up paying much more tax because the tax free allowances have changed, and are much lower.
Not only will you need to check that you’re paying the right levels of tax, but you will also need to ensure that, after you do pay, your income hasn’t been reduced to a point where your living expenses won’t be paid.
We will keep up to date with how this works out in April; it will be interesting to hear opinions.