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Changes to Taxation of Dividends – The Stealth Tax on Entrepreneurship

13
Jul

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There were a number of changes announced in the recent Summer Budget, the first Conservative only Budget for almost 20 years, but the one factor which will have the greatest impact on owner managed businesses seems to have gone under the radar.

The reforms announced regarding the taxation of dividends, in particular the removal of the deemed tax credit on dividends will have a very significant impact on any owners of shares in Limited Companies, and will result in increased taxes being paid by this sector of the economy.

Historically, and up until 5 April 2016 dividends were taxed as follows:

Dividend amount (£)Dividend tax rateEffective tax rate after dividend tax credit
0-42,38510%0%
42,386-150,00032.5%25%
150,000+37.5%30.6%

Owners of small Limited Companies could therefore take up to £42,385 (including the dividend tax credit) and effectively pay no personal tax at all. Their Limited Company would have paid 20% Corporation Tax on the profits already, giving an effective tax rate of 20% on all income. The effective overall tax rate including Corporation Tax above this figure was 40% (20% Corporation Tax, plus 25% personal tax on the 80% of the profits remaining after Corporation Tax).

From 6 April 2016 (using the 2015/16 tax bands) after the removal of dividend tax credits, dividends will be taxed as follows

Dividend amount (£)Effective tax rate
0-5,0000%
5,001-47,3867.5%
47,387-155,00032.5%
155,001+38.1%

These changes to the taxation of dividends are effectively a 7.5% tax hike on profits withdrawn from a Limited Company.

Using the normal profit extraction consisting of a small Director’s salary and dividends an individual taking £40,000 from their company will be around £2,000 worse off under the new rules, and 7.5% worse off for any amounts withdrawn above this.

These changes on the taxation of dividends mean it is more important than ever to review your company structure to work out the most tax efficient method of profit extraction. If you would like us to review your affairs please feel free to get in contact with us at the relevant office and one of our staff will delighted to talk about how Norton Accountancy can help you.

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