The introduction of the dividend tax on 6 April of this year has caused many small businesses to reassess their tax strategies. For many small businesses operating as limited companies, the salary/dividend combination had always proved to be optimal. Paying just enough salary to minimise national insurance liabilities and enough dividends to stay within the basic rate of tax has been a winning formula for man years.
The change in the rules at 6 April 2016, makes the standard sole directors/sole shareholder limited company, taking salary upto the national insurance threshold and dividends upto the basic rate threshold, around £2,000 worse off per year. For the majority, from a tax point of view, it still pays to remain a limited company (rather than being a sole trader). Plus, the benefits of limited liability, outside of the tax advantages are still prevalent.
The headlines surrounding the dividend tax have focused on the uplift in the dividend tax rates by 7.5%. So whereas dividends at the basic rate of tax had an effective tax rate of 0%, this now sits at 7.5%. What is often missed is that the first £5,000 of dividends, for any individual is tax free. With some clever planning strategies, you can make the most of this dividend allowance and minimise your tax bill.
Calculating your optimum dividends is all in the planning. Sitting down and working out your cash needs over the next twelve months will help you plan when to take dividends and how to take them as tax efficiently as possible. If you just withdraw your dividends without planning, the likelihood is you’re going to get hit with a big tax bill come the end of the year. Planning will help you minimise any potential liability.
If you’d like to discuss your tax planning options, get in touch, and let’s have a chat and see how I can help you save tax.