Changes to Dividend tax
Changes to Dividend tax came into effect on the 6th April 2016 and again on the 6th April 2018. The effect is those paying themselves dividends and a small salary are likely to have to pay more tax. Payable via their self-assessment as well as have to make payments on account. Current rates of dividend tax can be found here.
The Changes to dividend tax
From 6th April 2016, you can pay yourself a tax-free dividend of £5,000 anything above this amount you will pay additional tax. If you are a 20% tax payer you will pay an additional 7.5% tax on your dividends above £5,000. Below is a worked example of someone who pays themselves a minimum salary and a dividend up to the 20% tax band.
| 2019-20 onwards | £ | £ tax payable |
| Salary | £8,632 | 0 |
| Dividend (within Personal Allowance | £3,868 | 0 |
| Dividends within Dividend Allowance | £2,000 | 0 |
| Dividend at basic rate band | £37,500 | £2,812.50 |
| Totals | £52,000 | £2,812.50 |
The above illustrates that the changes to dividend tax mean an additional tax payment of £2,812.50 at the lower rate tax band. This tax will be payable via the self-assessment route. From 6th April 2018, there are further changes to dividend tax. The dividend tax-free allowance is reduced to £2,000 from £5,000. Resulting in an extra £225 in tax payable.
Changes to dividend tax and payments on account
If you have to pay more than £1,000 in tax each year you will have to make payments on account. This means that you pay 50% of next years tax in advance. In the illustration above the tax due for 2019-20 is £2,812.50 and payable by 31st January 2021. Assuming that you have not made payments on account for 2018-19, your payments to HMRC will be:-
Tax for 2019-20 £2,812.50
Plus 50% in advance (£2,812.50 x 50%) £1,406.25
Payable by 31st January 2021 £4,218.75
50% payable on 31st July 2021 £1,406.25
In effect, you are paying £2,812.50 for your 2020-21 tax bill in advance. HMRC makes adjustments once your 2020-21 return is submitted.
Although you pay more tax on dividends it’s still better than being employed as you don’t have to pay any national insurance on dividends. These tax changes potentially impact all company shareholders.
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