2016 Dividend Rules

The Chancellor announced a significant change to taxation of dividends in his 8 July 2015 Summer budget, to take effect from 6 April 2016

Planned changes:

• 10% notional tax credit being scrapped
• Introducing/ Replacing with tax-free Dividend Allowance of £5,000
• Dividends tax rates will be set at 7.5% for basic rate taxpayers (above the £5,000 allowance), 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

In short, this means that the majority of small Ltd Co owners who take a modest salary and most income as dividends will see a hefty personal tax hike.  Ignoring the £5k tax free amount, the tax rate on dividends, whatever your income level will increase by 7.5%.

• Basic rate – increase from 0% to 7.5%
• Higher rate – increase from 25% to 32.5%
• Additional rate – increase from 30.6% to 38.1%

There are discussions in accounting circles about the best ways to minimise the damage of this, but it’s generally accepted that it’s going to be punitive for small Company owners.

Of course a liquidation isn’t something you can do on a regular basis to keep your tax bills low, but if you have a cash rich company and perhaps:

• you’ve been toying with the idea of retiring/emigrating/taking on a permanent job anyway, or
• it ceased trading recently and you had planned to drip feed dividends at low tens of thousands a year to avoid personal tax,

…then this tax change may lead you to conclude that the most tax efficient route will be a solvent liquidation, as offered by MVL Online®.

Why MVL Online® could prove more favourable in these circumstances

An MVL enables you to get access to all the company’s cash within a few months, and to have it taxed on you at capital gains rates.  In many cases entrepreneurs relief will be available (though do verify this with your accountant), meaning the tax due on extracting these funds will be significantly lower than taking dividends.  You’ll normally expect to get the first ~£11k tax free (annual exemption), and pay just 10% on the rest.

Even under current rules this typically leads to significantly lower taxes than taking a large dividend.  Compare this with the dividend tax rates listed further up the page and you’ll see the difference increasing further.

We’d suggest discussing our offering with your accountant, see whether it might be suitable for your circumstances.  Please understand whilst we can assist with the liquidation, we cannot offer bespoke personal tax advice, your accountant would need to provide this.

If you do wish to proceed, we’d suggest first of all ensuring you/your accountant have completed all the steps in the top section of this page before completing the online form.