In the summer budget the government announced new rules to come into effect from 6 April 2016.

These rules included a tax on dividends at a rate of 7.5% however they also include a Dividend tax allowance of £5000 per year.

This will likely mean a increase in tax for and small business paying dividends including contractors.

This is an example (it assume personal allowances have been used by salary/other income)

A director/shareholder of a company taking a dividend of £20K

In 2015/16

There would be no income tax as the owner is a basic rate tax payer.

In 2016/17

Dividends £20K Dividend allowance: £5K Taxable dividends £15K

@ 7/5% = £1,125 tax to pay.

It should also be noted that the 7.5% increase is across all levels of tax payer:

Dividend tax rates 2015/16

Non-taxpayers 0%

Basic rate taxpayer 0%

Higher rate taxpayers 25%

Additional rate taxpayers 30.6%

Dividend tax rates 2016/17

Non-taxpayers 0%

Basic rate taxpayer 7.5%

Higher rate taxpayers 32.5%

Additional rate taxpayer 38.1%

(These rates are based on the actual dividend amount received.)

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