Philip Hammond stated to the House of Commons in his first Budget speech that the £5,000 Dividend tax allowance, introduced only a year ago was "very generous". True, it is more generous than the new allowance of £2,000, set to be introduced from 6th April 2018. Shareholders and Company Directors can rest easy then that the new dividend threshold, which Limited Company Accountants and Personal Tax Advisers have only just begun to get used to, will last another year!
Historical dividend taxation
It has been felt that for a few years the Contractor, or Company Directors employed through their own Limited Company, who formerly would pay themselves via higher dividends, low salary are now being taxed more than ever.
The old rules of dividend taxation vexed even those handy with a calculator, with the "tax credit" system, it almost seemed that it was set up to confuse people. Therefore the new rules, whereby a straight forward tax rate of 7.5%, 32.5% and 38.1% is applied, after the £5,000 allowance, depending on whether you are a basic, high or additional rate tax payer, is easier to calculate.
Given the choice though, I think most would rather stick with lower tax, more complex calculation, right?
To learn more how these changes affect shareholders and company owners you can read this article.
Corporation Tax changes
The 2017/18 tax year will see a reduction in Corporation tax for many companies from 20% to 19%. This is supposed to go some way to relieving the overall tax burden on Companies/Company Directors, offsetting the extra tax costs of dividends which are coming up.
This coupled with the new personal tax allowance in 2017/18 of £11,500, up from £11,000 in 2016/17, and an increase in the high rate threshold to £45,000, up from £43,000 in 2016/17, will actually mean a lower tax bill for the same income up to £43,000.
Last year someone earning £43,000 broken down into £11,000 salary and £32,000 in dividends would pay £2,025 in tax. In the 2017/18 tax year that same income, but broken down into £11,500 salary and £31,500 dividends would pay £1,987.50, a saving of £37.50.
The national insurance thresholds have increased too, but only for the Primary and Secondary thresholds resulting in a £12.48 saving for an income up to £43,000.
Costs to the taxpayer
Directors of their own companies may decide to increase their pay at least up to the higher rate threshold, overall £45,000, broken down by £11,500 salary and £33,500 dividend. This will result in tax of £2,137.50, an increase of £112.50, for an extra £2,000 in their pocket. Perhaps this is fair?
However, from April 2018, the same income of £45,000 (assuming that the high rate tax threshold doesn't reduce, and the basic threshold hasn't increased), will be taxed at £2,362.50, an extra £225.
For a high rate tax payer the new dividend allowance means an extra tax bill of £975!
The government have stated that the personal allowance will be £12,500 by 2020/21, but there's no news on what will happen from 2018/19 tax year. A company making a profit of £22,500 would save £225 under the new 19% Corporation tax rate, so if companies are able to make this level of profit the saving in tax here would make up for the extra dividend tax from 2018.
If only we could predict the future, maybe we wouldn't want to know and would have to cover our eyes in trepidation. It will be interesting the see how the world will look in 2021; it is certainly uncertain with the likes of Brexit and Trump and now Scotland!
I wonder if taxpayers are resigned to the constant uncertainty and inevitable taxation changes from all angles, in order to balance the budget? If it could be guaranteed that the deficit of the nation could be cleared by 2021, would we all not mind paying a bit more, for a future that was more stable?
Whether or not you are a One Click Accountant client, get in touch with us and we will make sure you get the right advice.