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What does the dividend reform mean for your business?

Mar 29, 201626 views

As we look towards the start of a new financial year our attention is drawn to the reform on the way dividends are taxed. From 6th April 2016 the current system will be replaced by a £5,000 tax free dividend allowance. Dividends in excess of £5,000 will be taxed at 7.5% for basic rate tax payers and 32.5% for higher rate tax payers. Essentially the dividend tax will be increasing by 7.5% for all dividends above £5,000.

 

What does this mean for owner managed businesses? Well unfortunately those tax payers who take small salaries up to their personal allowance and the rest of their remuneration via dividends are likely to see an increase in their tax bill. Previously there would have been no tax payable on dividends within the basic rate band, from 6th April there will be 7.5% tax payable.

 

In most cases these businesses will still be better off taking remunerations in this way rather than taking a larger salary however it does make the question of when to incorporate a business more complex and a decision that may now be worth delaying for many sole traders.