Dividend, Salary or Bonus?

Our team have been busy! Dividend rules have recently changed and Informed Financial Planning’s Senior Financial Planner, Andy Collinson, has found that this topic has been popular amongst his clients. A number of questions has prompted Andy to write this bespoke article to help you understand the new rules in further detail. As always, if you have any further questions, just drop Andy an email by clicking here.


Since the 6th April 2016 the new dividend rules have come into play and will affect many investors, particularly shareholding directors.

Typically shareholding directors have drawn income from their businesses, largely by way of a dividend payment, rather than salary, thereby avoiding the payment of National Insurance contributions.

Savings prior to the new rules were quite large, and going forward taking dividends rather than salary or bonus’ out of companies are still worthwhile, but the benefit is a good deal less than it was for most shareholding directors, especially if they are drawing large dividends.

The new rules have slightly complicated the tax system, as dividends no longer come with the tax credit of 10%, this still meant previously that basic rate tax payers did not pay tax on their dividends and other tax payers paid special rates based upon their total income.

The abolition of the tax credit also makes a difference as to how much taxable income someone has. Prior to the 6th April an investor would have needed to have grossed up their dividends in order to arrive at their total taxable income.

From the 6th April 2016, the amount you receive as a dividend is the amount on which you will pay tax. The first £5,000 of dividends an individual receives will not be taxed but beyond this level the dividend will be taxed as follows:

  • Basic rate tax payers will have to pay 7.5%
  • Higher rate tax payers 32.5%
  • Additional rate tax payers 38.1%.

It should also be noted the rate applicable for Trusts for dividends is 38.1% and Trusts do not get the £5,000 allowance.

The overall result is that it is still worth drawing dividends from a company rather than taking a salary or bonus but now the benefit is somewhat less than it used to be, especially for larger dividends.

 

If you need any further guidance on how the new rules will affect you personally please contact your financial planner at Informed Financial Planning.


This article was originally published on 16/05/2016.  Taxation reliefs, levels and bases can change in the future and the content of the article refers to our understanding of taxation legislation at the date shown.  Tax is dependent on your own personal situation and circumstances and is subject to change based on UK legislation and taxation regime.