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Dividend reform – not all doom & gloom!

by / Thursday, 9th July 2015

Yesterday’s Budget announcement by Chancellor George Osborne bought an unwelcome reform to dividend taxation which is predicted to hit small business owners (like us all) in the pocket. Because we all draw our income from our businesses as a mixture of salary (PAYE stuff) & dividends, the Chancellors headline numbers sounded pretty scary, but having worked out the reality of the numbers, we are feeling much more relaxed now!

The actual wording suggests that from April 2016, the basic rate of tax on dividends will be 7.5% and the higher rate will be 32.5%. The new rules allow for a £5,000 dividend exemption, but it is not yet clear whether this will apply to all dividend income or be conditional upon dividends taken. On the other hand, the good news for us ‘little business owners’ is that there is to be a reduction in corporation rate tax to 19% in 2017, followed by a further reduction to 18% in 2020.

WHAT DOES THIS MEAN FOR YOU?

Nothing in this tax year – it all relates to April 2016 onwards.

From April 2016, if you draw the current maximum amount from your business (before the normal income tax rate kicks in, you will be worse off by around £1,600 per year.

So, let’s keep this all in perspective – of course we don’t really want any changes to the dividend based income extraction routes, but from April 2016 onwards, the new rules will mean that if you are netting £41,000 in ‘take home’ money from your business, you will be in fact around £133 worse off than before the Chancellor took aim at us all!

WANT MORE HELP?

SSG will be posting all their ventures with updates and examples of what this might mean to them in the months leading up to the change in April 2016, but feel free to get in touch with Darren if you want to talk it through in more detail. In the interim, we are still lucky enough to know that running your own venture and drawing money from the business as a mixture of salary & dividends is still so much better than having to rely on PAYE!

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