Unless you’ve been under a rock for the last few weeks you’ll probably have heard about the changes to dividend tax.
But do you know how it’s going to affect you and your clients?
If I’m wrong, and you haven’t heard about it, don’t beat yourself up, the Government hid it well in the Summer Budget.
So what is it all about?
From April 2016 there’s a new tax coming into effect; any business owner who operates as a limited company will now have to pay an extra 7.5% tax on their dividends above £5,000. Now although this affects any shareholder who receives dividend income, we’re focussing on the effect on the small business owner in this article.
Most business owners pay themselves a small wage, generally equal to the personal allowance, through the payroll and the rest through dividends, when profits allow. This means that we (I’m a small business owner too) pay 20% corporation tax on our profits, and then the dividends we take out are not taxed, as they are deemed to have already been taxed at the basic rate of tax – 20%.
It’s been that way for as long as I can remember and certainly over the 15 years that I’ve been in business. This new tax was a real shock; it wasn’t mentioned in their General Election manifesto and yet the Conservative government claim to have put small business at the heart of their five year plan.
From April 2016 we’ll still have to pay the 20% corporation tax, but now as individuals we’ll also have to pay 7.5% extra tax on our dividends. Assuming we take the standard minimum payroll of £10,600 as salary (an amount equal to the Personal Allowance), any dividends we take up to £32,000 we’ll pay the 7.5% tax on, although the first £5,000 is tax free.
Once you go over the higher rate threshold – over £32,000 of dividends you’ll pay 32.5% tax on your dividends and it’s 38.1% for additional rate payers.
What this all means is more tax and less cash for the small business owner, and at a time when expenses are racking up; auto enrolment, possible interest rate rises, minimum and living wage increases and whilst many small firms are still recovering from the recession.
But there is some good news on the horizon. We launched a national petition against the dividend tax and it’s attracted over 30,000 signatures in just a few weeks – you can have your say if you disagree with the tax and sign here too: http://bit.ly/1UL0sf3
And if you want to help your clients, get them to sign it too!
Please note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of Sense Network Limited. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author.