Our analysis shows that the Chancellor’s planned changes to dividend taxes for the next tax year will perversely hit middle earners worse than those earning higher amounts.

Overall the vast majority of micro-businesses including contractors and freelancers remain better off as a limited company than as sole traders, but the transition to the new dividend regime for existing directors has some unusual thresholds. The proposals were announced in George Osborne’s Summer Budget with the aim to implement them in a 2016 Finance Bill ahead of the new tax year starting in April 2016.

A limited company director paying themselves primarily through dividends would be paying £1,528 more tax a year when their pre-tax profits are £48,000, whereas a director with £78,000 pre-tax profits will only be paying £1,343 more tax in the next financial year.

While we understand the Chancellor’s desire to balance the books by boosting tax revenue, it’s worrying that middle-earning business owners are being disproportionately hit by these changes. As the biggest and most dynamic part of the business sector, micro-businesses are taking risks to bring new ideas to market and provide highly skilled services. Yet the proposed changes see lower limited company earners hardest hit at the point when their income can be most unpredictable year to year.

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We are calling on the Chancellor to change his proposals to smooth the transition as income rises. We believe that middle earners shouldn’t be paying more additional tax on their dividends next year than those earning tens of thousands of pounds more. Ideas for how this could be achieved include retaining the 10% dividend tax rebate for those earning below a £50,000 threshold.

Let us know what you think about this issue and our proposed changes in the comments below.

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