Written by: Keith Tully
Reviewed: Tuesday 5th April, 2016
Changes to the tax rules relating to dividend payments are set to leave thousands of business owners around the UK out of pocket to a considerable extent in the coming months.
Announcements made by the government in 2015 outlined plans for an overhaul of Britain’s dividend tax system, with the aim being to generate billions of pounds in extra cash for the UK treasury.
However, for company directors, who in a many cases currently use dividends routinely to pay themselves in a straightforward and efficient fashion, are bracing themselves to be thousands of pounds worse off this year.
The incoming changes are expected to have a particularly profound impact on small business owners who will no longer be able to take advantage of the 10 per cent tax credit which had been part of the appeal in making dividend payments. This tax credit has been officially abolished as of April 2016.
Instead of offering a 10 per cent tax credit on dividends, business owners deriving income in this way will now be able to take advantage of a £5,000 tax free dividend allowance, in addition to the £11,000 personal tax-free allowance available to all earners around the country.
However, any amounts paid as dividends beyond this threshold will be subject to 7.5 per cent tax and higher rate tax payers will see their dividend payments taxed at notably higher rates.
The new thresholds mean that a tax rate of 32.5 per cent will be applied to annual earnings above £31,786, which would until recently have been taxed at the much lower rate of 25 per cent.
Meanwhile, anyone whose earnings through dividends exceed £150,000 will now see their payments being taxed at a rate of 38.1 per cent, where they would previously have been taxed at 31.6 per cent.
All of which leaves small and medium-sized business owners throughout the UK facing the prospect of being taxed at considerably higher rates than they have been accustomed to in recent years.
Commenting on what business owners can expect from the changes to the dividend tax regime, Clive Lewis from the Institute of Chartered Accountants in England & Wales (ICAEW) said in a statement: “Many small companies and their owners will pay more tax and NIC (dependent on the salary and dividend amounts they decide on).
“Along with the National Living Wage and auto-enrolment [of employees on to workplace pensions], the changes to dividend taxation are an additional regulatory burden for SMEs,” he said.
The introduction of a new National Living Wage has been among the most high-profile changes to business laws in recent months with every employer in the country now legally obliged to pay any member of their staff aged 25 or over at least £7.20 per hour.
According to the government’s own estimates, the law changes will immediately result in close to 1.4 million people across Britain benefitting from an increase in their hourly payment rates.
Meanwhile, small, medium and large UK businesses alike have been adjusting to new rules relating to workplace pensions which oblige every employer of any size to automatically enrol all members of their workforce onto retirement saving schemes of some sort.
Now with changes to the dividend payment tax regime having come into effect from April, many small business bosses are unhappy with seeing their regulatory burdens increased yet further.
Reflecting on changes to dividend taxes, Tom Berresford, who runs a small manufacturing business in Suffolk, told the Telegraph: “The difference is big enough to warrant a meeting with our accountant, and to pay our tax bills a year early so we can avoid the payments this year.
“We benefited from other parts of the Budget – such as the reduction in corporation tax – but every year the goal posts seem to move and it makes planning ahead very difficult.”
In defence of its changes to tax rules affecting business owners, a government spokesperson said last year that it is “fully committed to supporting business and entrepreneurship and a fair tax system”.
But some business men and women around the country have complained that the changes to dividend rules could have the effect of incentivising entrepreneurs to pay themselves a salary and to operate as an employee of a company rather than to be its owner and primary operator.
Others have suggested that the changes will only serve to encourage business bosses to establish their spouses or family members as shareholders in their businesses in order to limit their overall exposure to dividend taxation.
What the eventual ramifications of the government’s changes to dividend tax rules in the UK will be remains to be seen but professional advisors can certainly expect to see their services in increased demand in the coming months as a result of increased uncertainty around the issue.