During the Summer Budget 2015 the Chancellor announced new reforms which would change the way dividends are taxed. Here we look at the impact this may have on doctors.
- There will be a new dividend allowance from 2016-17 of £5,000 for all individual tax payers.
- There will be new tax rates for dividends. Any dividend income above the allowance above will be taxed at 7.5% for basic rate tax payers, 32.5% for higher rate tax payers and 38.1% for additional rate tax payers.
According to the Chancellor 85% of tax payers will be better off as a result of this reform however inevitably there are winners and there are losers.
For those higher rate tax paying doctors with modest, dividend paying, investment portfolios the £5,000 dividend allowance is generous and represents a saving of up to £1,250 in tax. For an additional rate tax payer the allowance brings about a saving of £1,528 in tax.
Doctors who are worse off are basic rate tax paying doctors with dividend income over £5,000. At present no tax is paid until their income hits the higher rate tax threshold. However from 2016-17 the tax will be 7.5%.
- Basic rate tax paying doctors are only worse off when their dividend income exceeds £5,000
- Higher rate tax paying doctors are better off until their dividend income exceeds £21,667
- Additional rate tax paying doctors are better off until their dividend income exceeds £25,250
Therefore the main losers could perhaps be doctors who earn private fee income through small private companies and draw (or intend to draw) large dividends. For the typical small business owner operating through a Limited Company taking a salary of £8,000 and dividends of £30,946 this means an additional tax of £1,751.
The other main loser is the doctor with substantial investment portfolios that create large dividend payments.
For a review of how the latest dividend taxation will effect you and how to plan around this - then please do get in touch for an initial chat on firstname.lastname@example.org or telephone 0117 966 5699.