If you run a limited company, you are probably already aware that the most tax efficient way to extract funds is by using a combination of low salary with the remainder as dividends.

Significant changes took place from April 16 whereby the old 10% tax credit was abolished and all dividends in excess of £5k per annum were subject to tax.

Dividend tax rates

The rates applicable are based on the tax thresholds as follows:

• 0% on dividends up to £5k per annum. Careful thought should be given to the possibility of having more than one shareholder for small businesses to make the most benefit of this allowance.
• 7.5% on dividends in excess of £5k and up to the basic rate tax threshold. This compares to 20% tax on earned income so dividends are still preferable to salary once all tax free allowances are utilised.
• 32.5% on dividends for income received above the basic rate income tax threshold.
• Currently, the ‘additional’ dividend tax rate of 38.1% applies to individuals earning £150,000 or more.