I was asked to do a quick bit of research on the new dividend regime and after doing some calculations I worked out that if a basic rate taxpayer for next tax year drew out the minimum salary and then dividends to bring them up to the basic rate band, that their actual take home pay after tax had been considered would be £1,465 higher than the old regime. I don't know if this is correct because I thought the whole point of the new regime was to put people off incorporating, but as all of the bulletins and articles all discuss the extra tax implication not the net take home position I thought it would be wise to get a second opinion. As dividends are no longer grossed up, surely this means that if you have a dividend up to the basic rate band of £34,900 (working on an estimated £8,100 for minimum salary), the net take home after tax is £43,000-£2,025 = £40,975 instead of the old regime which would have been £8,100 + £31,410 =£39,510. The £31,410 being the net dividend.
Am I missing something?
Replies (12)
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I haven't reworked your figures but they can't be right because the whole point of the changes is that the effective rates of tax on dividends go up, while all other rates basically stay the same.
cost to company
The net take home is higher, however the cost to the company is also higher (£43,000 versus £39,510).
Wrong comparison
If you are comparing take home pay then your first example should start with the same net dividend of 31,410 as in your second example, not a net (and gross) dividend of 34,900, as otherwise you are not comparing like with like. You will then see that the take home pay goes down.
You can't gross up to compare
In your old regime example, you have £31,410 to distribute. There's then a notional gross-up and a notional tax credit. But you still only have £31,410 cash for distribution, all other things being equal.
In your new regime example, you have assumed you can distribute the tax credit, but it's not there any more. You only have £31,410 in cash to declare the dividend. The 7.5% comes out of what would have been the net dividend under the old regime, not a grossed-up equivalent. Your answer assumes you get the 10% back before you pay the 7.5%, which obviously would give you a better net result, but it's wrong, because the tax will come out of the cash, not the non-existent tax credit.
it is not necessary to check or re-perform your calculation to know that they must be wrong. When tax rates go up after tax retentions go down. What could be simpler?
How much they go down, and whether and to what extent the reductions can be mitigated by planning, of course require careful calculation.
Apples and oranges
For a meaningful comparison you need to consider the position of both the individual and the company. It should otherwise be fairly obvious that if you increase the amount of the cash dividend there is a fairly good chance that take home income will also increase.
As Ruddles says, if you put the same dividend into each of your calculations you will get the right answer.
Ruddles is spot on
If you begin with a company cash pot of £50,000, the difference is that the company's cash pot is worse by the amount of the tax credit, £3,490, paid out under the new regime, and the individual is better of by £1,465, the difference being, surprise, the tax paid of £2,025
First rule of maths
If your calculations are right and the result doesn't make sense, you're asking the wrong question.
GIGO
If your calculations are right and the result doesn't make sense, you're asking the wrong question.