Owner managed company 'dividend tax' bills looming

Shareholders of owner managed companies should bear in mind the imminent arrival of new 'dividend tax' liabilities, the first of which will become payable through the Self Assessment system on 31st January 2018.

The introduction of  the 'dividend tax' was the subject of one of our update circulars in September 2015 and this is perhaps an opportune time to remind clients operating a business through a limited company and extracting profits as a dividend of the forthcoming new liabilities.

The operation of owner managed and family businesses through a limited company has for many years been a well-used structure to minimise tax liabilities on profits.  With many, an optimum tax position has been obtained by payment of a directors salary to utilise personal allowances, with dividends being declared sufficient to fund the additional personal income requirements of the business owner.  For some the benefit has been maximised by limiting dividends to such an amount as results in no personal higher rate tax liability being generated.  In these circumstances, the company has in the past paid Corporation Tax at 20% on profits and no further personal tax liability has arisen.

From 6th April 2016 the personal tax position on dividends changed.  Dividends received of up to an allowance of £5,000 suffered no personal tax liability but dividends in excess of this allowance falling within the basic rate band became taxable at 7.5%, dividends in excess of the higher rate tax threshold became taxable at 32.5% and for those with high income levels over £150,000, the rate of tax and dividends became 38.1%.

The stark difference for many clients is that in the past no personal Self Assessment tax liabilities have arisen on dividends but unfortunately this will no longer be the case.  The additional personal tax will first become payable on 31st January 2018 and the effect of the self assessment payment on account system is such that a payment on account, equal to one half of the liability for the previous year, will also be payable on 31stJanuary 2018.  A further payment on account will be due on 31st July 2018. 

We will be advising on the precise levels of dividend tax payments required through self assessment in conjunction with the preparation of personal Self Assessment Tax Returns and at this stage this is simply to remind you that a further tax liability will arise on 31st January 2018.

Please do not hesitate to contact us should you require any further information at the present time.