Do you have a limited company?
There is a new dividend tax which changes how much tax you pay as a shareholder/director when you are paid by dividends.
It’s one of the biggest tax changes for business owners in years.
- What are dividends?
- What is the new dividend tax?
- How might the new dividend tax affect me?
- Why was the new dividend tax introduced?
- What action do you need to take?
This is the update to Big Changes For How You’re Paid As A Limited Company
What Are Dividends?
Dividends are money issued by a company to its shareholders from profits after tax. Each shareholder receives a percentage of the dividends according to the percentage of shares they own in the company.
What does this mean for you as a one person business?
When you start a company (incorporate) it’s usually a limited company by shares, which means you own a percentage of the shares (equity) of the new company. It’s likely you own 100% of the shares and one way you pay yourself is to receive money from dividends from your company.
It’s the way most one person limited companies (or 2 or 3 person companies) receive the majority of the money from their profits (read Getting Paid As A Limited Company to learn more).
Dividends are also how you’re paid if you hold shares in other companies, often quoted on the stock market, and investments like trusts and trackers. I won’t be going into details of those, it’s just so you’re aware so you can take the action you need to.
What Is The New Dividend Tax?
The new dividend tax started on 6 April 2016 and is a new way of charging tax on dividends.
You have a dividend tax allowance which is currently £5000 and you can receive dividends up to that limit tax free.
After that limit, your dividend income will be taxed at basic, higher or additional rate (7.5%, 32.5%, 38.1%). Which band you’re taxed in depends on your other income.
This is personal tax, tax on you as an individual, rather than tax on your business. Hopefully your accountant explained all this when you became a limited company (if they didn’t, I offer coaching or hop on the guest list for my Demystify Limited Companies online course).
This new dividend tax replaces the previous tax credit (not the state benefit also called tax credit) which was complicated and outdated.
How Might The New Dividend Tax Affect You?
The new dividend tax is easier to understand and a simplification to the previous complicated mess.
This is good as understanding tax is important, especially when it’s your tax you’re paying. Knowing your tax money goes to paying for fire officers’ protective clothing (dare I suggest, fireproof kecks?) only goes so far when you’re handing over money. (Of course, it’s also education, health and important things like that, but you get my point).
What tax you will pay depends on the dividends being issued, what other dividend income you have and any other income, so I can’t say here whether you’ll pay extra tax.
What I can say, is that if you are a one person limited company issuing most of your personal income via dividends, it’s likely you will pay more tax than you did.
It’s a good incentive to grow your business and review your expenses and capital items to check you’re getting the best value you can. (I can help if that sounds like a good plan for your business.)
Why Was The New Dividend Tax Introduced?
So why the gerbil was this introduced if you’re going to hand over more tax, hmmm? And why do I, Rosie, think this is such a good idea, explain that one.
Well, yes, you’re right, there has been a bit of a fuss.
I believe it’s the right thing to do though and it’s a rare occasion when I agree with George Osbourne.
What it does is 2 key things:
- Level the playing field so sole traders don’t get so much of a raw tax deal compared to limited companies (more here)
- Simplify a horrendously complicated area of tax
I always say don’t go from sole trader to limited company only for tax reasons. This is why. Tax can change (learn more about getting paid as a limited company on my retreat and course. Details here).
We can’t moan and complain it’s complicated and then bitch when Mr Man does the rare case of actually making it easier, so actual real normal people can understand.
(Also, can I take this opportunity to say I welcome the day when it’s Ms Woman in the Exchequer hotseat).
So, yes, you may need to pay a bit more, but you know, some people may pay less. It depends on your income. The more you earn, the more tax you’ll pay.
What Action Do You Need To Take?
Now you understand:
- What dividends are
- What the new dividend tax is
- How the new dividend tax might affect you
- Why the new dividend tax was introduced
If you have a limited company
If you already have a limited company, I hope your accountant has already got you up to date and you feel confident understanding how the changes will affect you.
You have a plan in place for growing your business, increasing your profit margins (the amount you make after your costs) and reviewing your expenses and capital items.
Ask your accountant for support, and if they’re the type that doesn’t want to know, I can help.
If you don’t have a limited company yet
If you don’t have a limited company yet and want to know when is the right time and how it all works, have a look at my Demystify Limited Companies online course and retreat.
These articles will get you off to a good start:
- Getting Paid As A Limited Company
- Legal Structure
- What Is Class 1 National Insurance? (the NI for companies)
I hope my guide to the new dividend tax for limited companies has helped you feel more confident, informed and empowered to understanding how you’re paid in your business.
Do you have a limited company? Are you paid by dividends? Did you know about the new dividend tax?
If you need support understanding limited companies, the new tax changes – or for your tax return as a sole trader, get in touch.
If you’re interested in my retreats or Demystify Limited Companies online course, get on the guest list to hear the details first (including the Tick Off Your Tax Return retreat in London in July).
If you need easy to understand courses and guides with printable checklists and a sense of humour and mentions of cake, have a look in my shop.