Dividend Tax Changes
One of the more surprising announcements in the Chancellor’s July Budget statement was changes to the way in which dividends are to be taxed from April 2016. This is likely to have a major impact, both for businesses which are thinking of incorporating and for existing companies where the directors/shareholders take their rewards primarily by way of dividends.
Our analysis is that the tax advantages of incorporation will be quite modest from next April and indeed, at some profit levels may even result in a slight increase in tax, once National Insurance is factored in. Deciding whether to incorporate will likely cease to be a mainly tax-driven decision.
In contrast, for existing companies (especially family businesses) it will still be much better to take the profits primarily by way of dividends, rather than as remuneration. HMRC will tax dividends at all levels at a rate of 7.5% more than is currently the case (after deducting the £5,000 tax-free allowance).
The precise impact will vary enormously and will depend on not only the level of dividends taken, but also on the amount and nature of any other income. For example rents, savings interest and pensions. There is no “one size fits all” here.
There is nothing in the draft legislation which prevents you from bringing forward next year’s dividends into the current year and paying less tax overall as a result. This also happened when the 50% top rate was brought in a few years ago: the Treasury seemed content to simply pocket the accelerated tax receipts.
If you would like to talk about the dividend tax changes for 2016, please contact Rob Durrant-Walker or email@example.com – 01904 464 100