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Since Autumn 2015 we have been raising concerns about the planned changes to dividend taxes. While nobody likes a tax rise, it hasn’t been the long-term consequences that worried us but the short term implications of the transition from the old system to the new one. In particular lower earning owner-directors of incorporated micro-businesses will see an especially steep rise in tax payable for the 16/17 financial year.
We have raised these concerns with MPs in Westminster, leading to lots of questions and letters being sent to ministers. We were also able to discuss the issue with a Treasury minister and his officials. We have made good progress in raising awareness about this issue as sadly dividend taxes and micro-businesses have not historically been high on many agendas!
While disappointing, it wasn’t a huge surprise that the government committed to proceeding with the dividend tax changes in the 2016 Budget. What this means is that the planned increase of 7.5% for each band of dividend tax will form part of the Finance Bill 2016 which is due to be debated and voted on in Parliament in the next few months. Until the final vote is taken there’s still a slim chance of winning some concessions. (Yes, that does mean the law will be retrospective, applying from April 2016 if approved in the summer. It isn’t the only retrospective measure, some other changes George Osborne announced apply from January 2016!).
As we’ve analysed the various budget statements over the last few months it has become ever-clearer that there is no comprehensive long term strategy for taxation, especially in relation to micro-businesses. Have a look at how the tax payable changes over the years for an example micro-business owner-director earning £43,000 turnover each year. In our model this director is paying herself £8,060 salary each year and withdrawing all other profits after corporation tax as dividends.
As the graph shows, the 16/17 year sees a sharp £1,500 rise in tax payable, due to the new dividend tax system coming into force. Then as corporation tax reductions come into place, as well as increases in the personal income tax allowance, the tax payable declines to a level in 19/20 that is only £418.82 above where we started in 15/16.
It seems ill-considered to put smaller businesses through such a roller-coaster of tax over the coming years. This peak and trough is the outcome of the constellation of different tax systems not being considered in the whole. Until the 2016 Finance Bill passes the final vote there’s still a chance for MPs to consider alternatives that will soften the blow for smaller limited companies.
If you’re a company director for a micro-business there is still time to make your MP aware of what the dividend tax changes mean for you and to ask for their support.
Use the free service WriteToThem.com to enter your postcode and write to your local MP. These are some points we suggest you make in your message, but do make it your own:
You can link to a copy of our PDF one-pager briefing sheet on Dividend Tax changes.
Benefits in kind are benefits that employees or directors receive from their company which aren’t included in their salary or wages. They’re also sometimes called ‘perks’ or ‘fringe benefits’. Not all benefits in kind are treated in the same way by the tax system, so here's what you need to know.
If you spend time working from home, then depending on the work you do, you might be able to claim expenses back for using your home as an office, either by claiming for office equipment like computers and furniture, or even renting part of your home to your company. We break down the rules.