Taking money out of your company without paying any personal tax. At the moment if a company pays dividends to the shareholders and they are basic rate taxpayers there should be no personal tax liabilities!

For example, let us assume we have a husband and wife company that own the shares 50:50 and they have no other income.

Then under the current tax rules they could pay a salary of approximately £8,000 each, and take the rest of the money out of the company by way of dividends up to the basic rate threshold and neither of them would pay any tax.

The tax rules on dividends are due to change from 6 April 2016.

How will the new tax work?

Under the new rules the first £5,000 of dividend income will be tax free. Any dividends paid over £5,000 will have an additional tax rate of 7.5% for basic rate taxpayers. Tax of 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Under the new rules what if the dividend income is covered by the tax free personal allowance?

You can still claim your personal allowance against your dividend income. So, if you receive £16,000 of dividend income (assuming no other income), the first £11,000 would be covered by your personal allowance and the remaining £5,000 would be covered by the new dividend allowance. So no tax to pay in this example.

How was this taxed before the new rules?

Basic rate taxpayers paid no tax on their dividend income. Higher rate taxpayers paid an effective rate of 25% and additional taxpayers paid an effective rate of 30.56%

It is always important before you take any action that you obtain professional advice. If you have any questions in respect of the above, then please do not hesitate to contact our tax experts by sending an email to kevin@kwaccounting.com