Dividend Allowances for Company Directors explained

The new tax rules for dividend allowances for Company Directors in 2018 is explained by ESB Accountancy.

The new tax rules for dividend allowances for Company Directors in 2018 is explained by ESB Accountancy.

The current regime for taxing dividends has been in place since 6 April 2016. Under the rules, all taxpayers, regardless of the rate at which they pay tax, are eligible for a ‘dividend allowance’.

Although termed an ‘allowance’, in reality the dividend allowance is a nil rate band and dividends sheltered by the allowance are taxable at a zero rate.

The dividend allowance is set at £5,000 for 2016/17 and 2017/18, enabling all taxpayers to receive dividend income of £5,000 tax-free (on top of any dividends that are covered by the personal allowance).

Once the dividend allowance (and the personal allowance) have been used up, dividends are taxed at 7.5% to the extent that they fall within the basic rate band, 32.5% to the extent that they fall within the higher rate band and 38.1% to the extent that they fall within the additional rate band.

The dividend allowance is to fall to £2,000 from 6 April 2018.

This will impact on anyone who receives company dividends, either from investments or as part of a profit extraction strategy from a personal or family company.

Dividends are a popular and tax-efficient method of extracting profits from a personal or family company.

Where profits are extracted in this way, it is sensible to plan ahead to ensure that the higher dividend allowance available for 2017/18 is not wasted.

Where shareholders in personal or family companies have taken dividends of less than £5,000 in 2017/18, and where retained profits are sufficient, consideration should be given to paying a dividend before 6 April 2018 in order to mop up any unused dividend allowance for 2017/18.

For 2018/19 onwards, the allowance is only £2,000.

Paying a dividend after 6 April 2018 rather than before may mean (depending on the size of the dividend) that it is taxable where previously it was tax-free.

Assuming that dividends of at least £5,000 continue to be paid in 2018/19 (and the personal allowance is utilised elsewhere), the reduction in the dividend allowance will increase the tax payable by a basic rate taxpayer by £225, a higher rate taxpayer by £975 and an additional rate taxpayer by £1,143.

Talk to us at ESB Accountancy about tax efficient profit extraction policies and the benefits of planning ahead – with several decades of financial experience here in Gloucestershire you can either ring us now on  – email us on edith@esbaccountancy.co.uk or click the Contact Us buttonpayroll bookkeeping services small business help contact esb accountancy gloucestershire cheltenhamor please fill the form at the bottom of the contact us page.

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