Directors Squeezed by Tax Alterations

April 5th marked the end of the 2017/2018 tax year, and Directors may now be feeling the squeeze of not being able to use their £5,000 tax-free dividend allowance. The value of the allowance will more than halve from 2018/2019 onwards, and any unused allowance cannot be carried over to the new 2018/2019 tax year.

Those individuals who choose to pay themselves through dividends rather than a salary are to be solely affected, with this strategy being adopted by many small-business owners. This option has been seen to be mainly adopted by entrepreneurs, even though changes to the rules introduced two years reduced its attractions.

Previous rules stated that all taxpayers were entitled to receive dividend income of up to £5,000 before they paid any tax on this amount. Above this, basic-rate taxpayers pay 7.5% tax on their dividends, high-rate taxpayers pay 32.5%, and additional-rate taxpayers pay 38.1%.

New rules now mean that the allowance has fallen by over half to £2,000. ISA’s may be utilised by individuals earning most of their dividends from investments in order to shield their gains from tax. However, this will not be an option for small business owners. It may be an option to plan your affairs to mitigate your tax liability – for example where a spouse is a fellow director, but professional advice should always be taken to ensure you remain on the right side of the rules.

For further advice, please contact Paul Windmill on or on 01923 224411.