Maximise Your Dividend Allowance and Save £1625

dividend-tips

As you’re probably aware Dividend Tax rules have changed in recent years. Gone is the 10% tax credit to be replaced by a £5,000 tax free allowance and two new tax rates 7.5% for basic rate and 32.5% for the higher rate.

Basically, your dividend tax went up but the change also gave us the potential to save £1625 per year. Here’s how it can be done.

How does it work?

The changes to Dividend tax do provide us with one benefit that you may be able to use to offset the overall impact. This benefit lies in the rules relating to the £5,000 tax free dividend allowance.

This allowance is an annual allowance which entitles everyone on the first £5,000 (for 2016-17 tax year) tax free regardless of other income.

Under the old dividend tax system if your spouse was a higher rate tax payer there was never any value in giving them a dividend as their tax liability would have been as high as yours but with the introduction of the £5,000 tax free allowance this changes.

The £5,000 tax free allowance is available regardless of other income so even if your spouse has a PAYE income that takes them into the higher rate tax bracket they can still receive £5,000 of dividend income tax free.

(note: the £5k allowance is expected to reduce to £2k from April 6th 2018)

How much does it save

How much you save depends on your tax band but for ease lets look at an example where your total income is £60k (blended as £8k salary and £52k dividends)

Example Saving

Total Income £60k (Salary £8000 + £52k Dividends)

First £11,500 Tax Free (£0)
First £ 5,000 Dividend Tax Free (£0)
Next £28,500 Basic Rate Band 7.5% (£2137.50)
Next £15,000 Higher Rate Band 32.5% (£4875.00)
Total Tax Liability £7012.50

If in the above example you then declare a £5,000 dividend to your spouse it will reduce the value of your dividends taxed at 32.5% to £10,000 and they will pay no tax.

£5k Dividend to Spouse saves £1625

**Note if your overall drawings are less and your dividends don’t exceed the 7.5% tax band then your saving would be £375. (£5000 * 7.5%)

Is there a way to save more?

Yes but only if your spouse is a basic rate tax payer. If that’s the case you would be able to divert more of your dividends from your higher rate tax band (32.5%) to their basic rate tax band of 7.5%.
However the aim of this article is to highlight what can be done with the £5,000 tax free band alone.

What’s involved?

As you know dividends are allotted from post-tax profits according to the share allocation.

So if your company is registered with only 1 share you can’t give your spouse a dividend until the share structure of your company is changed and your spouse is formally a shareholder.

Note: timing is everything and this need to be done before the end of the tax year! (6th April)

When changing your share structure you may wish to issue a different class of share to your spouse such as “Ordinary Class B” or “Preference shares” which will enable you to change the voting rights available to them.

Steps to change your share structure (with links to downloadable templates courtesy of Inform Direct );

  1. Create board minutes to allot new share class
  2. Create shareholders written resolution 
  3. File a SH01 with Companies House (can be done online) (template)
  4. Issue Share Certificates
  5. Allocate shares to new shareholders via Confirmation Statement update (Co.Hse Online)

You will also now need to register your spouse for Self-Assessment and complete the annual tax return which should be very simple.

Conclusion

Although it’s a time consuming process if a proportion of your dividends are now taxed at the higher rate and your spouse doesn’t use their annual dividend allowance then the saving this year could be as much as £1625 and you’ll also have the option to use whatever allowance they have in future years.

You do need to be careful of Income thresholds!!!!!

1. If your spouse receives child benefit and their current PAYE income is £49,000 then receiving a dividend of £5k will put them in the higher earners charge and they will be required to pay back a proportion of their child benefit.

2. If your spouse earns £99,000 PAYE then issuing a £5k dividend will take them over the £100k threshold at which point they start to have their personal allowance removed which will greatly impact the tax they will pay.

Either of the above will likely make allocating shares to your spouse of such small benefit its not worth doing so just double check this first

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