Dividends are commonly used by business owners to extract profits from their company. In most situations this is particularly efficient as dividends don’t attract National Insurance Contributions.
However, from 6 April 2016 the tax rates for dividends will increase by 7.5% across the board. This will mean that a basic rate taxpayer, who currently pays 0% on dividends will pay 7.5%; and a higher rate taxpayer, who currently pays 25%, will pay 32.5%. There will however be a new £5,000 tax-free dividend allowance for all taxpayers and the notional 10% tax credit will be abolished.
These new rules are clearly going to significantly increase the tax payable by most business owners. For example, anyone drawing dividends of £30,000 (in addition to a small salary to cover their personal allowance) currently pays tax of £330 on those dividends. From April 2016 the same £30,000 dividends will cost £1,875 i.e. an increase of £1,545.
As a result it may be beneficial to look at whether it is possible to take more income before the changes take effect, consider introducing spouses as shareholders (if not done already) and review your profit extraction polices as a whole.
If you would like to speak to us about these changes and your options please get in touch.