Tax & admin · 3 March 2016

Dividend tax changes: What are the implications for small firms?

A £5,000 tax-free limit for dividend income will be introduced from 6 April

The impact of changes to the way dividends are taxed could fall particularly hardly on Britain’s small business owners and sole traders, the Institute of Chartered Accountants in England and Wales (ICAEW) has warned.

In a statement, the ICAEW suggested that because owner-managers of small firms often take income from companies as a mixture of salary and dividends, the government’s planned changes will fit these businesses with larger tax bills.

From 6 April 2016, the government’s current system of treating dividends as “tax paid” in the hands of shareholders will be scrapped to make way for the introduction of a £5,000 tax-free limit for dividend income and new rates of tax on dividends valued above that.

Income from dividends in excess of £5,000 after a taxpayer uses up any remaining personal allowance will from 6 April be taxed at 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher rate taxpayers and 38.1 per cent for those paying the highest rate of income tax who pay additional rates.

Commenting on the planned changes, the ICAEW head of enterprise Clive Lewis said: “Many small business owners will pay more tax depending on the salary and dividend amounts they decide on. Alongside the national Living Wage and auto-enrolment, the changes to dividend taxation are an additional regulatory burden for small firms.”

Dividends are currently received with a notional tax credit amounting to one-ninth of the dividend value, with higher rate tax payers required to pay a premium on top.

Lewis added that choosing to structure a business as a limited company could be less tax efficient for owners come April, whilst moving from a limited company to an unincorporated company structure could have its own taxastion implications for owners. “Business structure doesn’t just depend on tax considerations and each situation is different,” Lewis said.

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Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.