New dividend tax rules

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The surprise changes to the taxation of dividends in the Summer Budget will force business owners to reconsider their tax arrangements. It could also reduce the number of business incorporations, warn Harris & Co chartered accountants Northampton, the specialist small and medium sized business accountants


The new taxation treatment of dividends will commence from April 2016. The current dividend tax credit will disappear, and it will be replaced by a new dividend tax allowance of £5,000 a year.


The new rates of tax on dividend income above the £5000 allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.


The new rules clearly target self-employed people who operate through an owner-managed company.


So is it still worth being a limited company? Well it all depends!


When the new dividend tax rules bite, many small businesses will still find it slightly cheaper to be incorporated, rather than operate as a sole trader of partnership. The break point is about £140,000 – where the effective rate tax and national insurance (or corporation tax and income tax) is just over 39%.


When the corporation tax rate is cut to 19% from 1 April 2017, the break point will rise to about £160,000


Where income exceeds this level, the corporate structure costs an increasing amount of additional tax. At a more typical income level of £40,000, assuming that £8,000 is paid as salary, the new policy will increase the tax bill by about £1,300 a year.


However, depending on the amount of motor costs incurred, the tax savings from being incorporated can easily be wiped out. The tax regime for cars is much more favourable in sole traders and partnerships compared to limited companies.

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