Guide To Company Dividends, And Calculating Dividend Tax for Shareholder
Individuals holding shares of a company may receive dividends. As per the new rule, starting 6 April 2016, the Dividend tax credit was replaced with a new tax-free dividend allowance. Under this allowance, individuals won’t pay tax on the initial £5,000 of dividend income, irrespective of the non-dividend income. The allowance is accessible to anyone who has dividend income and is applicable from 6 April to 5 April of the following year.
Dividend Tax Calculator for the 2019/20 Tax Year
The Dividend Tax Calculator will help you calculate your liability of total personal tax that will depend on your annual salary and dividends you get during the 2019/20 financial year.
You will need to enter the relevant fields in the relevant boxes of the calculator attached below to help the calculator help you calculate the tax that you will have to pay for the financial year 2019-20.
Dividend Tax Calculator
* This calculator is only for reference purposes. For accurate and detailed report, please consult with an accountant. *
Dividend Calculator Notes
Dividend Allowance cut for April 2018
How much Dividend Allowance cut will cost you? From April 2018 it is anticipated to be reduced the amount from £5,000 to £2,000
What is a Dividend?
Dividends cannot be considered as business cost while calculating the Corporation Tax. Moreover, there are no certain rules which describe how often a business or organization should distribute the dividends.
Our experts at DNS accountants recommend that processing dividend payments annually will help the businesses analyse its profits and take the right action accordingly. Important thing to consider is that all dividend payments have to be legal (i.e. there is satisfactory retained earnings in the company to cover the dividends), or else they will be classed as illegal and could result in HMRC penalties.
Dividends and Limited Company Directors
Apart from the salary, majority of the limited company directors and shareholders withdraw most of their income in the form of dividends. Dividends are distributed by companies in order to return a percentage of company’s profit to their shareholders. A limited company structure is a more lucrative way for most business owners to work, as limited company directors are taxed in a different way as compared to their permanent (salaried) counterparts. Most limited company directors take a small salary, and withdraw the remainder of their company’s profits in the form of dividends.
Dividends are taxed at three different flat rates, depending on the income tax band. However, National Insurance Contributions (NICs) are not payable on dividend income, helping company directors save thousands each year as compared to traditional employees and sole traders.
Calculation of Dividend Tax
As per the current dividend taxation system, there are fixed tax rates applicable for tax year 2016/17 onwards. You are required to submit information about the income received as dividends to HM Revenue office.
For 2019/20 tax year onwards, dividend income is taxed as follows:
|Tax band||2018/19 Income||2019/20 Income||Tax Rate|
|Basic||£0 – £34,500||£0 – £37,500||7.50%|
|Higher||£34,501 – £150,000||£37,501 – £150,000||32.50%|
|Additional||£150,000 +||£150,000 +||38.10%|
The Chancellor Targets Dividends again, But Why?
In the Budget Speech of Spring 2017, the Chancellor said: “People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment.”
He made it very clear in his speech, that people irrespective of them being employees, self-employed, or director/shareholders, they should pay largely the same amount of tax.
He used this as justification, and announced a hike in the levels of Class 4 National Insurance paid by the self-employed (however, a u-turn taken shortly later) and a rise in the dividends taxation ways in the limited company.
On what the Chancellor has said, many experts and commentators have said, the Chancellor tried to compare non-employee taxation with employee taxation in his calculations, without taking into his views the huge sum of benefits, remunerations, bonus advantages employees get, something that is not available to non-employees for free.
Will this Dividend Allowance Cut Continue?
As a result of the General Election, the dividend allowance cut was dropped from the Finance Bill 2017. However, it will continue as expected from April 2018. The bill was re-introduced into a second Finance Bill (published on 8th September). On 16th November 2017, the Bill received Royal Assent.
See Part 1, Section 8 of Finance (No. 2) Act 2017 for the definite reference to the cut to £2,000 from £5,000, previously.
Dividend Allowance was executed on April 2016, as an indispensible change in the procedure dividends are taxed.
Dividend upon which dividend tax was imposed, under the tax credit system.
Before the process was executed on April 2016, Dividends were paid to stakeholders net, and multiplied by 10/9 to generate the gross dividend tax was executed, under the tax credit system.
Dividends are accountable to new tax rates (basic – 7.5%, higher – 32.5% and additional – 38.1%), ever since the new instructions came into existence in April 2016. This has made a conspicuous extra tax burden on owners of limited companies.
A tax free ‘dividend allowance’ applied to the first £5,000 of dividend income is seen as only single reduction made by dividend allowance. It means the first £5,000 of dividends are not accountable to taxes, but this sum continues to be within the significant tax bracket for overall purpose of taxation.
How Much Did The Dividend Allowance Reduction Cost You?
The reduction of dividend allowance from £5,000 to £2,000 was done from April 2018 onwards – just after two years the dividend allowance was first initiated. So how much you’re financially affected by the change depends upon which tax band the first £5,000 of dividends fall into.
In case they come under basic rate band, you are £225 worse off (7.5% basic rate dividend tax x £3,000). The cut cost higher-rate taxpayers £975, and additional-rate taxpayers £1,143.
Of course, should the first £5,000 of dividends comes under two tax bands, the total tax hit will differ from the overhead figures.
Dividend Tax Allowance
|Tax year||Dividend allowance|
|6 April 2019 to 5 April 2020||£2,000|
|6 April 2018 to 5 April 2019||£2,000|
|6 April 2017 to 5 April 2018||£5,000|
|6 April 2016 to 5 April 2017||£5,000|
Make sure you are updated with the latest changes in the taxation, reliefs and allowances to avoid any last minute glitches. There is an expectation as per the Budget documentation that the dividend allowance deduction will to increase an extra £800m to £900m per year for the Treasury.
Any questions? Schedule a call with one of our experts.