Planned Dividend Tax changes expected to hit SMEs hard

We expect the Government’s planned dividend tax changes will hit SMEs hard next year.

However, the extent to which companies will be affected is dependent upon the make-up of each individual business and the financial plans which are in place. 

Mitchell Charlesworth's Mike Buxton said the Government is expected to align income tax and dividend tax rates from May 2016 (the start of the new tax year).

Currently, basic rate taxpayers pay no income tax on dividends received due to the operation of the dividend tax credit system. But from April 2016 basic rate taxpayers who receive dividends in excess of £5,000 will have to pay 7.5 per cent income tax on any dividend above the £5,000 exemption rate.

“At the moment dividend tax rates are significantly lower than income tax rates, but that is all set to change,” said Mr Buxton. “The Government’s plans represent a real tax rise to the majority of SME shareholders and directors who have historically adopted a small salary large dividends remuneration policy. It will have a significant effect.

“Many SMEs will have to recalculate the best way to take remuneration out of their company. Should they take more salary, for instance? It all depends on the level a firm is operating at. It might also be worth companies taking a larger dividend this year to minimise the effects next year but it all depends on the business.

“There is no ‘one size fits all’ answer – every company is different and each case must be looked at on an individual basis.”

In the current tax year an individual could extract a salary of just over £8,000 and dividends of just under £30,900 and pay no income tax. But applying the same policy next year would result in income tax charges of £1,722.

For higher rate taxpayers, the effective rate on dividends is set to jump to 32.5 per cent from 25 per cent and for additional rate taxpayers from 30.6 per cent to 38.1 per cent.

From April 2017 the effect of this new dividend tax regime will reduce slightly when corporation tax is reduced to 19 per cent, however this will still not offset the increased dividend tax.

Mitchell Charlesworth’s specialist accountants and business advisors recommend that anyone affected by the changes has their position reviewed before April 2016.

“This is particularly important for owner managed businesses and SMEs which have historically adopted a dividend-based remuneration policy,” said Mr Buxton. “Among the options they may wish to consider is the declaration of dividends before April 2016, increasing other forms of remuneration and reviewing the shareholding structure".

Mike concluded "we can help companies achieve the most tax-efficient outcome by looking through all options and planning effectively".

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