The owners of small businesses in the UK are to bear the brunt of the efforts made in the 2017 Budget to reduce the UK’s deficit.
Following the introduction of a dividend allowance of £5,000 by his predecessor – with a tax charge on dividends that exceed this amount of at least 7.5% of the excess – Chancellor Hammond has reduced the allowance to £2,000 from the start of the 2018/19 tax year.
Many commentators are noting that this action is likely to affect those receiving dividend income by increasing their income tax bill by £225, this being the reduction of £3,000 x 7.5% (the rate of income tax payable by those whose total income does not cause them to be higher rate tax payers).
However, we would like to look back a couple of years, before the dividend allowance was introduced.
A typical scenario of the time might have seen a director/share holder receiving a dividend of (say) £20,000.
With a salary of £10,000 there would have been no additional tax to pay, as the total income was insufficient to generate a higher rate tax liability – ie there was no additional tax payable.
Assuming that same taxpayer now has a salary equal to the personal income tax allowance, the tax payable on the dividend income from 2018/19 will be £18,000 (ie £20,000, less the dividend allowance of £2,000) x 7.5%, or £1,350.
Alternatively, with a salary equal to the personal allowance, and income of £32,000 received by way of a dividend:
- The first £2k will be free of tax
- The next £30k will be taxable at 7.5%, giving tax payable of £2,250.
It should also be remembered that the company paying the dividend has already paid corporation tax before the dividend is declared – no longer do we have an imputation system in the UK whereby the dividend is accompanied by a franking credit representing the tax already paid by the company.
Remuneration strategies for those running a business through a limited company should be kept under review – contact GM Expat Tax to discuss your options, particularly if a departure from the UK is under consideration.