From the tax year 2016/17, HMRC are implementing tax rate changes on dividends which can affect limited company contractors. Therefore we would always recommend that limited company contractors should consider any tax planning options with their dedicated accounts team prior to the end of the tax year 5 April 2016.
As a result of these changes, there is a chance that your contractor's personal tax may increase next year. However, one of the advantages contractors have from running their own limited company is the control that they have so dividend planning may allow contractors to partly mitigate some of the impact of the new changes prior to the end of the tax year.
Tax Rates 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 a contractor's 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.