HOW WILL DIVIDENDS BE TAXED FROM 2016? WILL INCORPORATION TO REDUCE TAX STILL BE A VALID OPTION?
The new tax rate of £7.5% on dividends to be introduced in 2016 is potentially designed to discourage forming a company for tax purposes.
Under the current system 2 shareholders in a company (typically husband and wife) can receive dividends up to the basic rate tax threshold without having to pay any income tax.
FROM APRIL 2016 THIS WILL NO LONGER APPLY
From April 2016 shareholders can receive £5,000 dividends tax free. However, after that they will pay tax at 7.5% up to the basic rate tax threshold. In practice this represents an increase in tax of £2,400 payable by each shareholder.
We believe this completely change the way contractors make decisions as to whether to incorporate or not. Incorporation solely for tax purposes will no longer be seen as carrying the advantages shareholders have today.