As a limited company contractor you may be aware of HMRC's tax rate changes on dividends for the tax year 2016/17. We always recommend that you discuss and consider any tax planning options with your dedicated accounts team prior to the end of the tax year on the 5th April 2016.
However, as a result of these changes, there is a chance that your personal tax may increase for you next year. One of the advantages of running your own limited company is the control that you have, so dividend planning may allow you 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 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 a 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.
Our dedicated accounts teams have already communicated this change to all of our limited company contractors however if you have any questions please don't hesitate to contact them for more information.