Why small owner managed businesses need to look at their dividend strategy now

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February 4, 2016
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March 16, 2016

Why small owner managed businesses need to look at their dividend strategy now

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Until now the personal tax effect of taking a dividend for owners of small owner managed businesses has been pretty low, but from 6th April 2016 individuals are likely to see an increase in their income tax liability.

What are the changes?

  • The 10% notional tax credit will be scrapped, so you no longer have to gross up your dividend in your personal tax computation.
  • A £5,000 dividend nil band will be introduced. This will not reduce a taxpayer’s total income but will be applied to dividend income within their basic, higher rate or additional rate income tax bands.
  • The tax rates will be 7.5% for dividends in the basic rate band, 32.5 in the higher rate band and 38.1% in the additional rate band.

Example

    2015/16 2016/17
    £ £
Salary

8,000

8,000

Dividend Income received

12,000

12,000

Plus notional tax credit

1,333

Total Income  

21,333

20,000

Less: personal allowance

(10,600)

(10,600)

Taxable income  

10,733

9,400

Tax at 10%

1,073

Tax at 0% on £5,000

0

Tax at 7.5% on £4,400

330

Less tax credit

(1073)

Tax due  

Nil

330

Tax increase    

330

 

This example highlights the advantage (where company reserves allow) of a business taking a higher dividend in the current tax year.

Should I still run my business through a company?

In the short term some business owners may feel disheartened with this tax rise coupled with the additional administrative effort and costs of running a company, however it is worth taking a longer term view. The additional personal tax burden will be eased in part by the proposed decreases in corporation tax rates over the next few years.

What should I do now?

You should always discuss your personal circumstances with your own accountant. If you don’t feel comfortable chatting to your accountant read this.

I love working with small business owners. I’m passionate about really getting to know them and their businesses so I can resolve their specific issues and problems. If you’d like to receive regular tax tip updates or book a discovery call, drop me an email on laura@pieaccounts.co.uk or follow me on facebook at http:/www.facebook.com/pieaccounts

 

1 Comment

  1. David King says:

    The change in dividend tax is certainly something to think about and it is good to have a clear straightforward example.

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