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The Dividend Tax Change: How will this affect small businesses?

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During the summer budget that was announced in July 2015 the Chancellor announced a change to the way dividends are to be taxed.

From April 2016 the new rules are set to come into force where a 7.5% increase in tax is to be charged on any dividends taken from a business that exceed £5,000 per year.

The overall tax paid will depend on the income tax rate band that the Director currently pays. Here is a table that sets out how the tax rate will change:

 

Dividend tax rates 2015/2016 2016/2017
Non-taxpayers 0% 0%
Basic rate taxpayers 0% 7.5%
Higher rate taxpayers 25% 32.5%
Additional rate taxpayers 30.6% 38.1%

 

Directors will also need to be aware that if the dividend income pushes the overall income from one tax band into the next then they will pay the higher dividend tax rate on the portion of income that falls into that higher tax band.

Under the current system, basic-rate taxpayers pay no tax on their dividend income. This is because dividends are only eligible to be taken from a company’s profits and therefore will have already had corporation tax applied to them.

The new dividend tax change will effectively mean that a business may have to pay two lots of tax on company profits; corporation and dividend tax. This will apply if the dividends that are paid exceed the £5,000 limit and the individual is currently a basic rate taxpayer or above.

Dividend income will still be eligible for the personal allowance. For example; if next year a Director had a dividend income of £16,000, the first £11,000 would be covered by the personal allowance and the remaining £5,000 would be covered by the new dividend allowance. This situation would result in a Director paying zero tax.

Due to these changes it is expected that businesses are going to bring forward dividends to the current tax year ahead of the change and then alter this system accordingly going forward.

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