Dividend changes for Contractors 2016

There’s been much uncertainty surrounding the summer budget and how exactly this will affect contractors coming into the 2016/17 tax year. However the changes to dividends seems to have caused the most ambiguity amongst Limited company contractors, but how will the proposed dividend changes actually affect contractors?

To try and ease any confusion we have put together an easy to read guide with examples of how these dividend changes will affect the 2016 tax year. Again the following information is subject to change until implemented in 2016.

2016/2017 tax changes to dividends - how will dividends work in practice?

From April 2016, the following bandwidths will come into play for dividends.

Tax-free dividends           First £5,000 of dividends per tax year
Basic rate (7.5%) Total Income Up to £43,000
Higher rate (32.5%) Total Income Up to £150,000
Additional rate (38.1%)  Total Income Above £150,000

Based on John working 200 days and a variable of factors detailed below, the below case study shows Johns take home pay through dividends.

We always advise contractors seek expert advice from their accountant on the most tax efficient way to manage their finances. With the correct tax planning advice this could influence the total take home pay.

2015/2016 Calculation

John invoices his end client for a gross income of £83,040
(£80,000 + £3,040 including VAT flat rate saving)

  • £10,634 is taken as a gross salary (approx. £10,318 net salary)
  • £5,000 as expenses
  • £53,925 as dividends (after corporation tax paid of £13,481.20)

Of the £53,925 dividends the total tax payable on dividends is £6,337 (based on 2015/2016 tax structure)

  • John’s dividends after tax are: £47,588
  • John’s net salary (after NI) is: £10,318
  • John’s total net income after tax and NI is: £57,906
  • Take Home: 70%*

2016/2017 Calculation

John invoices his end client for a gross income of £83,040
(£80,000 + £3,040 including VAT flat rate saving)

  • £11,000 is taken as a gross salary (approx. £10,645 net salary)
  • £5,000 as expenses
  • £53,632 as dividends (after corporation tax paid of £13,408)

Of the £53,632 dividends: 

  • £5,000 is tax free
  • The next £27,000 is taxed at 7.5% = £2,025

The reason it’s only £27,000 at 7.5% is because the £43,000 limit is for your total income, including the salary. £43,000 - £11,000 salary = £32,000. Of the £32,000 we have already used £5,000 as tax free dividend, which leaves £27,000 of the basic rate band.

  • The remaining £21,632 of dividends are taxed at 32.5% = £7,030.40

So total tax on dividends is £9,055.40 (£7,030.40 plus £2,025)

  • John’s dividends after tax are: £44,576.60
  • John’s net salary (after NI) is: £10,645
  • John’s total net income after tax and NI is: £55,222
  • Take Home: 67%*

*Special Note: John’s take home pay for 2016/2017 is based on him taking every available dividend from his Limited company and does not factor in; professional tax planning advice, any additional income, additional shareholders, pension planning and the number of days contracted.

So despite the uncertainty surrounding this subject of dividends, the percentage of take home pay can be affected by as little as 2% - 3%, which based on the above example of working 200 days, means lessening your take home pay by around £13 a day - again this does not factor in expert tax planning advice.

Full details of the summer budget can be seen here by clicking the following link:
Summer Budget Report.

For more information on contracting, or further advice on dividends, please call our new client services team on 0500 152500 / 01442 275789 or email jaime.thorpe@sjdaccountancy.com

SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
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  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee starting from £120 plus VAT per month. Check our packages for more detail.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: janice@sjdaccountancy.com. Our new client services helpdesk is open Monday to Friday (8am to 6pm).

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You may also find the following pages, guides and case studies useful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.