Dividend Tax Overhaul: What It Means for Your Small Business

In the Summer Budget earlier this month, George Osborne announced a series of changes to the way that dividends operate. Dividends are paid to business directors as a means of lowering financial risk to SME investors, and with London being the primary home of small businesses in the UK, our London financial advisors have provided this breakdown. The overhaul will take effect from April 2016.

Existing Rules:

  • Beneficiaries receive a 10% tax credit;
  • £111 of basic rate tax is paid for every £1,000 of dividend income. Therefore, those in the basic tax bracket up to £31,785 do not pay tax on this income;
  • Those on the higher tax bracket pay 30.6% on dividend income.

 

Example:

Hypothetically, if a director receives a £40,000 dividend payment instead of a basic salary, they currently receive the full amount of £40,000 (no dividend tax). If they are a higher rate taxpayer, they pay £10,000 tax, meaning they receive a £30,000 dividend payment. Additional rate payers will pay tax of £12,240 and receive a £27,760 dividend payment.

 

Incoming Rules:

  • Dividend income will be taxed, as it will be classed as gross income;
  • There will be a tax-free dividend allowance of £5,000 per investor per annum;
  • After the tax-free bracket, beneficiaries will pay tax on their dividend according to their tax bracket;
  • Everybody who receives over £5,000 will pay an extra 7.5% on their dividends;
  • If this results in a beneficiary being pushed into a higher tax bracket, they will have to pay the higher rate of tax of 32.5%, and additional rate taxpayers will pay 38.1% tax;
  • Anybody who receives their dividend income in an ISA will keep their tax benefit.

 

Example:

Under the new rules, anybody taking a £40,000 dividend payment will receive £37,375 if they are basic rate taxpayers, after a tax of £2,625. If they are higher rate tax payers, they will be taxed £11,375 and receive £28,625. Additional rate payers will receive £26,665 following a tax of £13,335.

 

Taxrate Current Rules (£) April 2016 Rules (£)
Basic 40,000 37,375
Higher 30,000 28,625
Additional 27,760 26,665

 

Implications for Small Businesses

Dividends are a mechanism generally used by small businesses as a method of controlling tax. SMEs see dividends as a tax incentive, in an otherwise risky financial world. According to City Wire, there has been some reorganisational activity to protect against the new changes, but GPFM, our London and Hertford financial advisors would suggest that businesses seek further advice before making any drastic changes to their finances.

Setting up a new business means taking on a significant amount of risk, and while the changes to dividends will have some impact on investors, our London financial advisers can help you to minimise your losses by creating a new and effective strategy.

Contact us today on 01992 500261, or email us at enquiries@gpfm.co.uk.