The new tax year means that many directors of family companies will be considering the most tax efficient method of paying themselves.
Dividends are a special case when it comes to tax and have their own rates and rules. The taxation of dividends was radically reformed from 6 April 2016 and the rules outlined below apply to a dividend paid on or after that date.
A new set of rules applies to tax dividend income from 6 April 2016 onwards. Under the new rules, dividends no longer come with an attached tax credit. This means that there is no grossing up calculation, but also no tax credit to set against the tax due.
The new dividend tax regime came into effect from 6 April 2016. Gone is the dividend tax credit and in its place a new dividend allowance for all taxpayers. There are also changes to the dividend tax rates.
Question: When is an allowance not an allowance?
Answer: When it is the dividend allowance.
The taxation of dividends changed significantly from 6 April 2016. Gone is the 10% tax credit and the need to gross up to find the taxable amount and in its place a new dividend allowance and new rates of tax.
The way in which dividends are taxed is changing from 6 April 2016. For basic rate taxpayers, the new rules are far less generous than the current rules. With this in mind, profits permitting, it may be worthwhile to pay an additional dividend before the end of the 2015/16 tax year to make the most of the current regime.