On 6th April 2016, major reforms to the way dividends used by UK small business owners to pay themselves are taxed will come into effect. Turner Little explains how the new reforms to dividend tax, could affect UK small to medium sized enterprises (SMEs).
Government reforms
As company formation agents, Turner Little can provide advice on, establishing a limited company. This form of business creation can allow you to pay your salary through company dividends. At present, small business owners who utilise this option receive dividend payments net of a notional 10% tax credit.
Under the current system, small business owners who are basic rate tax payers benefit. If their primary source of income is the company dividends they receive and they only earn a small salary, they may not be required to pay any personal tax to HM Revenue & Customs (HMRC). UK Chancellor George Osborne has criticised this policy, saying it provides firms with a “loophole” allowing companies to pay their staff via dividends to avoid meeting their full income tax responsibilities.
In the Summer Budget 2015, Osborne announced that the government will close this loophole by making changes to dividend taxation. As of 6th April 2016, dividends which fall into the higher and additional rate tax bands will be taxed at 32.5% and 37.5% respectively. However, this will be offset by a 10% tax credit. Furthermore, every investor in every business will receive a tax-free dividend allowance of £5,000 every year.
Impact for small businesses
So what does this mean for small business owners? The main beneficiaries of these reforms will be those whose dividend income is less than 5,000 – the smallest company owners. They will not pay any dividend income tax, allowing them to save up to £1,250 of their firms’ money every year.
The biggest losers of this policy will be top rate paying small business owners. At present, they pay dividend income tax at an effective rate of 30.6%, providing them with leftover revenue to grow their firm’s operations. Following these reforms, the top rate of tax on dividend income will increase to 38.1% for the 2016/2017 fiscal year, depriving their companies of useful capital.
Meanwhile if they sell their company, these parties pay capital gains tax at a rate of 28%; this will not change. As a result of this policy change, the losers could also include professionals who receive no additional income. For example, if you fall into this category and you currently receive roughly £38,000 of dividend income tax-free, from April 2016 you will have a tax bill of around £1,700.
Coming to grips with reforms
SME lobbying group the Forum of Private Business (FPB) has expressed concerns that these reforms could deprive small companies of vital capital and maybe even discourage entrepreneurship in the UK. Commenting on the dividend taxation changes, the FSB said: “Changes on how dividends are taxed may, in effect, be a tax on success… Small business owners, who pay themselves last, are [going to be] left with a tax bill when they finally reward themselves for good company performance.”
When Whitehall’s changes to dividend taxation come into effect, they could have an impact on your firm’s bottom line if you pay yourself via company dividends. If you are unsure of how this will affect your venture’s taxation obligations, seek professional advice from experts. It would also be wise to invest in effective company finance infrastructure, such as the UK banking services provided by Turner Little, to ensure your business can effectively fulfil its tax obligations going forward.
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider.
