Any doctor or dentist who is an owner or director of a limited company, and who gets paid partly or wholly by dividends (rather than a salary), has just had a valuable tax break reduced by 60%!
Up until April 2018, anyone in this position could receive £5,000 a year in dividends before paying tax. This tax-free dividend allowance has now been slashed by £3,000 to just £2,000 a year.
It means that any dividends you now receive over the new £2,000 allowance will attract tax at your marginal rate. The table below shows the different dividend tax rates for basic, higher and additional rate tax payers. You may need to scroll left and right if you’re viewing the table below on a small screen.
|Income Tax Band||Earnings||Tax Rate on Dividends Over Your Allowance|
|Basic rate||£11,850 – £46,350||7.5%|
|Higher rate||£46,350 – £150,000||32.5%|
|Additional rate||More than £150,000||38.1%|
In other words, the loss of £3,000 from your tax-free dividend allowance equates to an increase in your tax bill of £225 for basic rate tax payers, £975 for higher rate tax payers, and £1,143 for additional rate tax payers.
If you live and work in Scotland, things are more complex. For one, income tax rates are now totally different from the rest of the UK. In a nutshell, you need to take advice.
How do you pay this higher tax?
If your dividends are between £2,000 and £10,000 a year, you can either apply to the HMRC for a tax code alteration or you can complete a self-assessment tax return.
If your dividends are over £10,000 a year, you must complete a self-assessment tax return.
What else do you need to consider?
The implications of the reduced tax-free dividend allowance are not just confined to how you pay the extra tax you now owe.
- The accountancy work that will need to be done to rearrange your dividend drawings will incur additional costs.
- You may also find it more difficult to get a mortgage as not all mortgage providers will fully consider dividends in their income calculations.
- The use of tax-sheltered ISAs, for example, becomes all the more essential.
As ever, you should speak to your independent financial adviser and accountant to find out exactly how the lower allowance affects both how you pay yourself and your investment portfolio.
Will the reduced tax-free dividend allowance change how you pay yourself? Let us know by adding a comment below.