Limited company owners – forthcoming changes from 6 April 2016

At present, shareholder directors of small companies have enjoyed the use of a perfectly legal strategy that minimises National Insurance costs by paying themselves a reduced salary and the balance of their remuneration as dividends.

From 6 April 2016, the overall tax cost of this arrangement is set to rise. From 6 April 2016, the first £5,000 of dividend income is tax free, but any additional dividends, will be taxed at:

  • 7.5% if the dividends form part of your basic rate band
  • 32.5% if the dividend forms part of your higher rate band, and
  • 38.1% if the dividend forms part of your additional rate band.

In practice, this will mean that any person in receipt of significant dividends will be likely to pay more tax.