From April 2016, the Government is introducing big changes to the way dividends are taxed, which may impact smaller businesses across the UK.
At present, dividends are treated as ‘tax paid’ in the hands of shareholders. The government plans to abolish this system. As a replacement, dividend income will have a £5,000 tax-free limit, and any income in excess of this will be taxed at 7.5% for basic rate taxpayers.
The rate increases to 32.5% for higher rate taxpayers and to 38.1% for those on the highest incomes paying additional rate income tax.
These particular changes will likely have the largest impact on smaller businesses, where owners take income from their companies as a combination of salary and dividends.
For example, a sole trader with a profit of £75,000 would mean £23,130 in dividend tax under the new rule, compared to £23,290 previously. Whereas for a limited company with the same amount of profit, the tax will increase to £21,462 from £19,053.
Head of Enterprise, Clive Lewis from ICAEW, commented, “Many small companies and their owners will pay more tax and NIC (dependent on the salary and dividend amounts they decide on). Along with the National Living Wage and auto-enrolment, the changes to dividend taxation are an additional regulatory burden for SMEs.”
As a result, choosing to use a limited company can be less attractive in terms of tax efficiency, and this may encourage them to move to unincorporated business structure. However, all the potential repercussions of doing so should be taken into account if this is something you are considering.
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