Where now for the dividend tax changes?

Posted on Mar 22nd, 2016 | Tax

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 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 are a director of one of the 3.4 million companies incorporated on the Companies House Register. Like you, most of these are micro-business of 9 or fewer employees
  • The planned changes to dividend taxes due in the Finance Bill 2016 will hit lower earning directors particularly hard. You believe this is an unfair burden.
  • You would like them to raise these concerns with ministers and to seek amendments to the Bill to mitigate against these transitional impacts on smaller businesses like your own which are more vulnerable to sudden rises in tax.

You can link to a copy of our PDF one-pager briefing sheet on Dividend Tax changes.

  • Notes on our model:
    Assumes a single limited company director generating £43,000 company turnover each year. All profits after £8,060 salary and corporation tax are withdrawn as dividends
  • Personal allowances are calculated as 15/16 – £10,600; 16/17 – £11,000; 17/18 – £11,500; 18/19 – £12,000; 19/20 – £12,500
  • Corporation tax is calculated as 15/16 – 20%; 16/17 – 20%; 17/18 – 19%; 18/19 – 19%; 19/20 – 17%

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