HMRC has published guidance on how the Dividend Tax changes will work in practice, highlighting that the £5,000 Dividend Allowance is in fact not an allowance at all but a zero rate band. The taxman’s Dividend Allowance factsheet shows that the changes will end up costing most contractors £1,250 more tax than previously thought.
“When the Dividend Tax changes were first announced in the Summer Budget, experts agreed that the £5,000 Dividend Allowance was a tax-free allowance in addition to existing allowances,” highlights ContractorCalculator CEO Dave Chaplin.
“HMRC has now confirmed that, because the Dividend Allowance is not actually an allowance but a zero rate band, and is not taken off as allowances usually are, that £5,000 still contributes to total taxable dividends. The result is that it pushes more dividends into the higher rate band, costing most contractors an extra £1,250 on top of what we originally thought after the Budget.”
ContractorCalculator’s Dividend Tax Changes Impact Calculator has been updated to account for HMRC’s latest guidance, so contractors can input their salary and dividend payments and see the impact that the changes will have on their tax and net earnings from April 2016.
When working out what tax they will have to pay, Chaplin explains that contractors can use any remaining personal allowance not used up by salary for dividends, and then the first £5,000 within the basic rate band is taxed at zero per cent. The next £27,000 of dividend income is taxed at 7.5%. Dividend income in the higher rate tax band is taxed at 32.5%, and additional rate tax is 38.10%.
So, for example, from April 2016 a contractor who pays themself a salary of £8,060 and £50,000 of dividends will pay £6,919.50 in tax. This is £2,142.63 more than the current pre-April 2016 regime and £1,250 more than when the Dividend Allowance was assumed to be an allowance, and not a zero rate band.
Contractors who have typically paid themselves up to the higher rate threshold and who previously paid no tax on dividends will now find themselves paying an extra £1,721 per year.
Chaplin concludes: “It is important to note that the Dividend Allowance factsheet is only HMRC’s guidance, and not the full and final story. We won’t see this until the Finance Bill is published next year, so we could see even more changes.”
