If you are an owner director the way in which dividend tax is calculated is changing for the 2016/17 accounting period. If you are an owner director, I strongly recommend that you book a consultation with your accountant or financial advisor to discuss how you will look to remunerate yourself in the forthcoming accounting period.

The reason why it is important to speak with your accountant is because Her Majesty Revenue & Customs (HMRC) are amending Pay-As-You-Earn (PAYE) codes for these changes to take effect from the 6 April 2016. HMRC will be using your previous tax information to set your new P2 PAYE code. Therefore, in order for you as an owner not to incur a large tax bill come Self Assessment you will need to have discussed how you will look to take funds fro your business prior to the 6 April 2016.

The changes mean that the average company director who takes home a modest salary within their personal allowance and the rest of their income through dividends, will pay more tax in the 2016/17 accounting period.

For example,

A company with profits of £60,000.00.

The owner director wishes to receive roughly £43,000.00 for the accounting period 2016/17.

The director takes a modest salary of £8,060.00 and the remainder £34,900.00, as dividends. Under 2015/16 accounting period rules the total dividend tax, National Insurance Contributions (NIC), and PAYE payable is £794.33. (Note: Dividends in 2015/16 accounting period came with a tax credit. If your dividend fell within the standard rate tax band of 20% there was no tax to pay on dividends). From our example, NIC and PAYE are £nil, tax on dividends up to £31,785.00 is nil, because of the tax credit element, as such tax is only changed on the £3,115.00, above the basic rate threshold at 25.5%, less the 10% tax credit totalling 32.5%.

However, with the changes that come into effect on 6 April 2016 the total tax liability due on the same income in 2016/17 is £2967.50 an increase of £2173.18. The increase is a resultant of the rate dividend tax is now charged. There is a 7.5% dividend tax for the basic rate taxpayer, 32.5% for a higher rate taxpayer, and 38.1% for an additional rate taxpayer. There will no longer be a 20% basic tax rate in the 2016/17 accounting period on dividend tax.

How does this work? For dividends of up to £5000 there will be no dividends tax due, however from £5000.00-£32,000.00 the tax rate is 7.5% (£27,000.00 at 7.5% = £2,025.00), from £32,000.00-£150,000.00 the dividend tax rate is 32.5% (£2,900 at 32.5% = £942.50) and for an additional rate dividends taxpayer (£150,000.00, plus) the rate is 38.1%.

If you are an owner director and have concerns about how the changes will affect you. There are strategies available that may help you reduce your tax liability. It is worth taking professional advice sooner rather than later. You do not want a headache come Self Assessment, as a result of ignorance.