I run a small limited company with my wife. In previous years we have each taken a small salary then dividends from the remaining profits. This has previously left us with no tax bills. Now I find we both have tax due. Why is this?

Up until 2016, dividends paid had a tax credit attached to them. This meant that they were treated as if you had already paid 10% tax (e.g. £90 received was treated as £100 less £10 tax credit). Dividends within an individual’s basic rate tax band were also taxed at 10%. This meant that, as long as your total income did not reach higher rates, no tax was due on dividends.

The new rules eliminated the tax credit, replacing it with a dividend allowance instead. This is a tax-free allowance for dividends (£5,000 up to 5th April 2018, dropping to £2,000 thereafter) in addition to the personal allowance. This allows those with small share portfolios to continue receiving dividends tax-free, whilst increasing the tax take on those with larger amounts of dividend income. Dividends over this allowance are taxed at the appropriate rate.

This has caught out many small business owners, who were used to being able to extract profits from their companies tax-free as you have done. As you have discovered, this has resulted in tax bills for you both, and will continue to do so in future. If you are unable to do the calculations yourself, you should engage the services of an accountant.

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