Big changes to the taxation of dividends on their way

For a long time businesses have chosen to incorporate to enjoy a tax benefit alongside the limited liability status. But from April 2016 this benefit will change drastically.

So what is the tax benefit currently enjoyed?

The self employed and partnerships pay income tax on their profits, meaning that they pay tax at 20%, 40% or 45% depending on their total income. They also pay national insurance at 9% or 2% depending on their self employed income. The rules mean that even if you don’t draw this income out [perhaps if you’re investing in the future of your business] you still pay these rates of tax.

Limited companies pay corporation tax and this is paid for most owner managed businesses at 20%. They also do not pay national insurance.

When the owners of companies draw funds out of their businesses this is often treated as dividends. At the moment dividends are deemed to come with a deemed basic rate tax paid at source. This is intended to represent the corporation tax paid.

So if you currently receive dividends from a company and are a basic rate tax payer then you don’t pay any more tax and you don’t pay national insurance. Higher rate taxpayers pay 25% extra tax if applicable, and no extra national insurance.

So there are significant savings by arranging your affairs this way.

What is changing?
There are two major changes, firstly a dividends tax of 7.5% applied to dividends at all income levels, and secondly an allowance for dividends of £5,000 per year beneath which the 7.5% tax doesn’t apply.

We calculate that a business owner who currently draws £60,000 from their limited company will pay an extra £4,000 in tax under the new rules.

Why is it changing?
The government state that the current arrangements are not fair because those employed are unable to enjoy the tax break that owners of limited companies do.

You can make up your own mind about whether you believe that but of course as business owners we know that owning and running a business involves more risk and fewer benefits [such as sick pay, holiday pay and redundancy]

So what can be done?
The first thing is to talk to us about your remuneration strategy for April onwards, and consider carefully the timing of dividends between now and then.

There is also a petition to ask for the matter to be considered again if you disagree with the changes you can sign it by clicking the link below.

Click to sign petition

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s