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Dividends were originally devised when the rate of corporation tax was higher. The current dividends system for basic rate taxpayers is that no tax is paid on the income from dividends. As of 6th April this year, the tax on dividends is changing.
Who will be affected?
The group who will be impacted the most by these new changes are those who own or part own limited companies, who take high dividends to offset a low wage.
Those who pay the basic rate of tax who receive over £5000 a year in dividends will experience a significant effect due to the changes, as they will have to pay tax at 7.5% above this threshold.
Those who receive less than £5000 in dividends will see an improvement in their situation, as they will only pay tax at a rate of 0%.
What can you do?
In many instances, income from fixed interest funds and corporate bonds are taxed with interest tax, not dividend tax, so they should not be affected. Dividends received will not be taxed if they are paid into a pension, but will be taxed as income in line with existing rules when withdrawn.
The changes made mean that pensions take on even greater significance in terms of what they can offer prudent tax planning. A SSAS is a pension scheme that works as a stand-alone trust with its own deed and rules. This creates a protected environment for the assets of your directors. This allows the biggest scope of investment opportunities of any pension scheme.