It’s not uncommon for directors/shareholders of small companies to pay themselves from their companies via a mixture of salary and dividends.
Up until now, if your total personal taxable income for the current tax year comprises of only monies taken from your company, then you could take £671 per month as salary, plus up to £30900 as net dividends, and pay no personal tax.
However, from 6 April 2016, this all changes.
From 2016/17, if you take the above amounts, the salary remains tax-free, but the dividends will be taxed differently.
Using the £30900 dividend as an example, the new rules state that of the £30900 dividends, the first £5000 will be tax-free, but the remainder, less any unused personal allowance, will be taxed at 7.5%, meaning additional personal tax of about £1700.
For those who take dividends so that they go into higher rate tax, there will be the 7.5% tax charge up to basic rate limit, plus a further 32.5% on the excess that is in the higher rate tax threshold (rises to 38.1% for additional rate tax payers).
Not all is bad news – the company tax rate will be reduced from 20%, to 19% with effect from 1 April 2017, and to 18% from 1 April 2020.