26 February 2018
If you’re a company director, you’ll be making use of the current £5,000 tax-free dividend allowance when paid any dividend payments. But in April 2018 the dividend income rules changed, with your allowance cut to a far smaller £2,000.
What does this cut to the dividend allowance mean to you?
If you’re a limited company director, it means reviewing your current wealth planning to make your pay is as effective as possible.
Paying yourself as a director can become a complex business when it comes to completing your annual self-assessment tax return and minimising your tax costs.
As well as paying the corporation tax and business taxes that your limited company is liable for, each director in the business must complete their own personal income tax return each year.
That personal income can be made up of a mixture of PAYE income, dividend payments, pensions contributions and loans, so it’s important to have your personal finances up to date – and also to carry out periodic reviews of your tax planning to make sure you’re not paying more tax than is needed.
So, what exactly is the dividend allowance, and how does it impact on your income and tax return as the director of a limited company?
The dividend allowance was introduced in April 2016 and replaced the existing rules around income from dividend payments. As a company director, the dividend allowance provides you with a £5,000 tax-free allowance – so you pay no tax on any dividend payments received during the year, as long as the total amount falls below this £5k threshold.
Any income that goes beyond the £5k allowance is then taxed at three different rates:
What’s changing is the size of the tax-free allowance, a move that will have differing impacts depending on the tax band your directors’ pay falls into.
The dividend allowance has been reduced down to £2,000. In Budget 2017, the Chancellor of the Exchequer, Philip Hammond, announced that the allowance would be cut from £5,000 to £2,000 from April 2018 – and there’s potential for this to affect your self-assessment tax bill.
With the size of the allowance available to you being decreased, more of your income will become taxable. The impact of this will vary depending on which tax band your dividend income falls into – with the most significant impact being felt by those in the 38.1% additional rate band.
In short, the overall impact is likely to be minimal for most directors, but this change stills need to factored into your tax planning for the coming year.
For company directors that receive income from dividend payments, this reduction in the tax-free threshold is a good prompt to review your current wealth planning for the year.
If you think you’re likely to be affected, this is an opportunity to review your existing tax planning and look for ways to make your directors’ pay more effective. There are various ways to mitigate the impact on your income tax bill, including paying more into a personal pension scheme, or holding off on any dividend payments that would push you over the £2k threshold.
If you think your dividend income is likely to be affected by the reduction in the dividend allowance, talk to your professional tax advisers and take action now – the sooner you act, the more time you’ll have to refresh your tax planning for the coming year.
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