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 business team on 01442 275789 or email newbusiness@sjdaccountancy.com.