PSCs, are you ready for £3,000 less in dividend allowance?

It might date back to an announcement almost three years ago, but a change to dividend taxation will hit PSC contractors – in earnest – from next month, writes James Trowell, head of tax at Dolan Accountancy.

In fact, from 6th April 2018, there are significant changes to the tax-free dividends allowance. These changes will reduce the 2017/18 tax-free rate from £5,000 to £2,000 -- per tax year, in 2018/19.

The Changes 

Tax Free Dividends Allowance £2,000
Personal Allowance £11,850 (up from £11,500)
Basic Rate (7.5%) Total Income up to £46,350
Higher Rate (32.5%) Total Income between £46,351 & £150,000
Additional Rate (38.1%) Total Income Over £150,000

From the 6th April these tax bands and rates come into force. 

Impact on Take-Home Pay – an example

Contractor Dan works 200 days in the 2017/18 tax year, and the same again in the 2018/19 tax year.

We look at Dan’s take-home pay via the route of a minimal salary and withdrawing all available dividends.

2017/2018 Calculation

Dan’s circumstances are as follows:

Dan IT Ltd’s gross income is £81,120 (£80,000 + £1,120 VAT flat rate saving).

  • £8,160.00 is paid to Dan as a gross salary (also net salary)
  • £10,000 is incurred for expenses
  • Corporation tax is payable by Dan IT Ltd at 19% (£11,962.40)
  • This leaves £50,997.60 paid to Dan as dividends

Dan’s personal tax due on his salary and dividends amounts to £6,738.52 (based on 2017/18 tax rates).

Therefore, Dan’s take-home after Tax and NI is £52,419.08 (salary and dividends after tax).

2018/2019 Calculation

Based on the same assumptions as above, below shows how the 2018/19 changes will affect Dan’s take-home pay.

Dan IT Ltd’s gross income is £81,120 (£80,000 + £1,120 VAT flat rate saving).

  • £8,424.00 is paid to Dan as a gross salary (also net salary)
  • £10,000 is incurred for expenses
  • Corporation tax is payable by Dan IT Ltd at 19% (£11,912.24)
  • This leaves £50,783.76 paid to Dan as dividends

Dan’s personal tax due on his salary and dividends amounts to £6,616.27 (based on 2018/19 tax rates).

Therefore, Dan’s take-home pay (after tax and NI) is £52, 591.49 (salary and dividends after tax).

Note: the take-home pay is based on Dan taking all funds available as a dividend and does not factor in: additional income, additional shareholders, pension planning or any professional tax planning. Nor does the tax figure factor in the payments on account, child benefit repayments or student loan repayments.

Final Thoughts

As you can see, Dan’s take-home pay for the 2018/19 tax year is £172.41 higher.

While there is a reduction in dividend allowance, the changes to the basic rate and personal allowance mean the impact is positive in this example. However, this example does not factor in professional tax planning.

We always advise contractors to seek tax-efficient and expert advice from their accountant, as there are usually more advantageous approaches to take, rather than drawing all the funds available as dividends.

Despite the changes that are being made, the freedom, flexibility and efficiency of contracting is still more beneficial than PAYE. Talking to an adviser really is the only way to maximise those benefits. This is especially recommended given the prospective dent in take-home pay that an extension to the private sector of April 2017’s public sector changes to IR35 could cause.

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