As of April 2016, the way that dividends are taxed will be changing, and for many shareholders the results will be less money in the pocket and more being taken in tax. Although the costs to companies will actually remain the same, those who receive a dividend of over £5,000 will be taxed at a higher rate when compared to this year, and the changes are far from insignificant, with increases of generally around 7.5%.
This will be of particular significance for shareholding directors who, typically, will take dividends in place of their salary or bonuses to ensure that they are able to maximise their spendable income. Once the new rules come into force, company directors will still benefit from paying themselves with dividends rather than with a salary, however the extent of these benefits will be reduced – in brief, this means that you would be wise to continue taking dividends, but should also expect to have less spendable income than in previous years.
A Third Option?
However, the two separate options of salary or dividend aren’t actually the only choices available to you, and the third option may be an even more viable route. This additional choice is to use the money as a pension contribution, and could potentially lead to significantly larger rewards than the other two options.
This is because pension contributions can combine the benefits found across dividends and salaries, leaving you with the best of both worlds: they are simultaneously allowed as a deduction for corporation tax (as are salaries) and not considered when calculating National Insurance contributions (similarly to dividends).
Of course, choosing to use the money towards your pension can also have many other long term benefits, since it assists with long term financial planning and can help you to ensure that your income remains secure and consistent once you have retired.
Consider Your Unique Circumstances
Although this information gives a basic guide to what you should expect from the upcoming changes, and potential options for securing your own finances, it is also important to consider your own specific circumstances – each individual is inevitably going to be affected slightly differently according to their unique situation.
As independent financial advisors in Lancaster, we can discuss those situational factors with you to help ensure that the solution you find is suitable for you individually – here, as with all financial matters, there is no one size fits all solution. Please don’t hesitate to get in touch with us with your queries, whether online, by phone on 01524 416872 or even over on our Facebook and Twitter pages.