Announced during last year’s emergency (summer) Budget, the proposed dividend tax changes, known as the new tax-free Dividend Allowance, are due to come into force on 6 April 2016, replacing the old Dividend Tax Credit.

Under the tax-free Dividend Allowance changes, all UK residents won’t be taxed on the first £5,000 of dividend income they receive each year, with dividend income above the new £5,000 threshold taxed at:

  • 7.5% on dividend income that falls within the basic rate band
  • 32.5% on dividend income in the higher rate band
  • 38.1% on dividend income in the additional rate band

It’s important to keep in mind that these changes will not affect dividends received via tax-exempt pension funds, as well as dividends you have received on shares in an Individual Savings Account (ISA), as is the case now.

Impact on Small Business Owners

Designed to tax small businesses who purposely pay their owners and executives a small salary (in order to secure their access to the State Pension), with the bulk of their income coming in a larger dividend payment, the government has marketed these changes as a boon for the majority of the population: a £5,000 Dividend Allowance, on top of the current £11,000 personal allowance, sounds rather attractive after all.

However, the impact of the proposed dividend tax changes on small and medium-sized business (SME) owners has the potential to create a negative affect on small business bottom line’s across the country.

In an online petition created under the title “Reconsider the new Dividend Tax for small businesses,” petition creator Frauke Golding noted that:

“The Government have stated that business is going to be at the heart of their programme for the next 5 years. Small businesses make up 99.3% of all private sector businesses and we provide just under 50% of all private sector jobs. There is a real danger that this new tax, along with auto enrolment and minimum wages increases, will have a significant effect on those people brave enough to start up a business that could make a meaningful contribution to the economy and jobs market.”

In response to Mr. Golding’s petition, which at time of writing has received 46,627 of the 100,000 signatures it needs to be considered for debate in Parliament, HM Treasury commented in defence of the dividend tax change, noting that “The Government is fully committed to supporting business and entrepreneurship,” before launching into three paragraphs that touched upon the government’s desire to reduce Corporation Tax from 20 to 18 percent by 2020, as well as a rundown of the benefits small business owners are also soon to receive:

“Owners of small companies will also benefit from a range of other measures announced at the Summer Budget, including an increase in the National Insurance Employment Allowance to £3,000 from April 2016 and a permanent increase to the Annual Investment Allowance to £200,000 from January 2016. They will also pay less tax as a result of the increases to the tax-free Personal Allowance to £11,000 and to the Higher Rate Threshold to £43,000 in April 2016.”

Our Advice

In light of the tax-free Dividend Allowance coming into force on April 6, our advice for small business owners is to take some time to look through the numerous examples the government provide in their Dividend Allowance factsheet to get an understanding of whether you will be better or worse off as a result of the change. For more information on governement changes and the effects they have on you or your business, have a read of our pieces on the following:

Budget 2016: Key Takeaways for Contractors

Budget 2016: Key Takeaways for Companies

Budget 2016: Key Takeaways for Individuals

If that’s not enough, we have a wealth of information on our blog too.

For personalised advice to this effect, we encourage you to contact your tax adviser.

Experienced Tax Accountants

To speak with a professional accountant to discuss the tax implications of the new tax-free Dividend Allowance, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.