Tax Rate on Dividends

From April 2016, HMRC will increase the tax rates on any dividend income which may result in higher additional personal tax liabilities via your self-assessment tax return. They will abolish the 10% tax credit on dividend income from April 2016. In its place will be a £5,000 dividend tax allowance, meaning that the first £5,000 of dividend income will be taxed at zero rate.

Dividends in excess of £5,000 will be taxed at the following rates:

  • 7.5% within the basic rate band
  • 32.5% within the higher rate band
  • 38.1% in the additional rate band.

Below are some examples so you can see the approximate change from this tax year (2015/16) to next tax year (2016/17).

Example 1 - £10k Gross Salary, £20k NET Dividends

£10k gross salary - £30k NET dividends

Example 2 - £10k Gross Salary, £30k NET dividends

£10k Gross slsary - £30k NET dividends

Example 3 - £10k Gross Salary, £50k NET dividends

£10k gross salary - £50k NET dividends

Travel & Subsistence Expenses

We're glad to see that HMRC have decided that businesses operating outside of IR35, may continue to claim tax relief on travel and subsistence (T&S) expenses.  However it is expected that legislation will not allow such T&S claims for contractors working through an Umbrella or for those operating a Deemed payment model through their PSC from April 2016.

Employment Allowance

There are changes to the Employment Allowance from April 2016 as this will no longer be available for PSC's where the sole director is the only employee. In most cases, the financial impact of this should be minimal.

Tax Efficient Salary for 2016/17

The most tax efficient salary for the 16/17 tax year is £155 per week and we will contact you again towards the end of this tax year to confirm what salary you wish to pay yourself as naturally this is your decision.