Dividends

Changes in the taxation of dividends from 6 April 2016.

These changes only apply to shareholders. There is no effect on the company paying the dividend.

Taxation of dividends to 5 April 2016.

The net dividends (ie the amount actually paid into your bank account) is added to a deemed tax credit (10%) to arrive at the gross.

Net dividend £9, Tax credit £1, Gross £10 or net divided x 10/9 = gross. The gross amount is then taxed and the rates are:

  • Basic rate 10%
  • Higher rate 32.5%
  • Additional rate 37.5%

The deemed tax credit is then deducted from this to arrive at the liability. Once the tax credit is taken into account there is no further liability for basic rate payers. 25% on dividends within the higher rate band and 30.56% on dividends chargeable at the additional rate.

For 2015/16 an individual can have a salary of £10,600 and gross dividends of £31,785 (£28,606 net) and not have to pay any tax.

Taxation of dividends from 5 April 2016.

There is no tax on the first £5,000 (£2,000 from 6 April 2018)  of dividend income. This £5,000\£2,000 is a zero-tax band for dividend income only but it is part of the basic rate band (not an extension to it). Personal allowances can also be set off if they are not being used elsewhere. The rates are then

  • Basic rate 7.5%
  • Higher rate 32.5%
  • Additional rate 38.1%

Where a shareholder draws a salary equal to the personal allowance, the additional tax due for 2016/17 compared with 2015/16 will be approximately as follows.

Net dividends                      Extra tax

£                                      £

10,000                                  375

20,000                               1,125

30,000                               1,530

40,000                               1,770

50,000                               2,527

60,000                               4,030

100,000                             5,267

120,000                             8,150

The Revenue’s notes on dividends can be found here.

 

What is the payment date of a dividend?

Usually a dividend is treated as paid when an enforceable debt is created. This is dependent on the companies’ Articles of Association. Generally, these will say:

  • A final dividend must be declared by ordinary resolution.
  • Interim dividends can be declared by directors from time to time.

Where this is the case, the payment dates are as follows.

Final dividend.

If a final dividend is properly declared by an ordinary resolution, then if no payment date is specified, the debt is immediately enforceable. Where a future payment date is specified, the debt becomes enforceable on that date.

Interim dividend.

An interim dividend be varied or cancelled at any time up to the date of payment.  It can only be treated as paid when it is actually paid. If by cheque, it is paid when the cheque is handed to the shareholder by the company, or when it is posted by the company. If payment is made through a loan account with the company, it can only be treated as paid when it is available for the shareholder to withdraw, and this is usually when the entry is made in the company’s books. If the entry is not made until accounts are prepared after the company’s year-end then the payment date is in the later period and not the accounts period.

What dividend falls in what tax year?

Unless there is a 5 April company year end the accounts will straddle the tax year. As a result the dividends shown in the accounts for s year ended 30 June 2016 will fall within 2015/16 if “paid” before 6 April 2016 or in 2016/17 if “paid” after. Where possible it will usually be more tax efficient for the shareholder if the dividend falls in the early year. Ensure you have company minutes and dividend vouchers in support of dividends.

 

 

Published 7 September 2017.

Updated 23 November 2018.