New dividend tax rules kick in from 6th April 2016 which increases the tax cost for shareholders of limited companies.

The current system of dividend tax credits is being abolished.  At the moment, if you with draw £900 in cash dividends this is treated as £1,000 of taxable income in your income tax return.  However, you also get a 10% dividend tax credit which completely offsets the basic rate tax liability on the dividend which means that no additional income tax is due on dividends which attract the basic rate of tax (i.e. within the 20% income tax band)

From 6th April 2016, £900 in cash dividends will be treated as £900 of income in your personal income tax return with only the first £5,000 being treated as “tax free”.  The rest will be charged income tax at 7.5% up to the basic rate (20%) band and 32.5% in the higher rate (40%) tax band.

As an example, someone extracting profits tax efficiently up to the basic rate (20%) band in 2016/17 can expect to pay up to £1,900 more in tax than they did previously.

It may be worth paying some extra tax in 2015/16 to extract any retained profits left in your company as this will cost you more in 2016/17 and forwards.

Get in touch to transfer your account to PDS and get some tailored advice on what to do.

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