Showing posts with label incorporation. Show all posts
Showing posts with label incorporation. Show all posts

Monday, August 10, 2015

Changes To Dividend Taxation From April 2016

You will have heard by now of the changes that were announced during the Summer Budget 2015 last month regarding dividend taxation.

To re-cap, the current proposals are to abolish the 10% tax credit on dividends from April 2016 and replace it with a new £5,000 dividend allowance. The proposals also set out the intention to change the rate at which dividends are taxed from April 2016 to the following:

  • Basic rate band: 7.5%
  • Higher rate band: 32.5%
  • Additional rate band: 38.1%

Currently the effective rates are 0% in the basic rate band, 25% in the higher rate band and 30.56% in the additional rate band. Since the Summer Budget last month no further information has been released, and we are still waiting for the draft legislation which may not arrive until the Autumn Statement later this year.

As it stands the information provided is very general, and the following is unknown:

  • How the dividend allowance will interact with the personal allowance
  • Whether the dividend allowance is available in full for higher and additional rate tax payers

If the proposed changes go ahead then it is clear that personal tax liabilities will increase for director/shareholders who pursue a strategy of taking a small salary and dividends to extract profit. But it's impossible at this stage to a reliable calculation.

Many people are wondering whether it still makes sense to operate as a Limited company or if it will be more tax efficient to operate as a sole trader from April 2016. However it's impossible to answer this question right now as it is rumoured that Class 4 NIC may increase, partly due to the fact that Class 2 is being abolished from April 2016. And the much publicised ‘Tax Lock’ does not apply to Class 4 NIC.