A taxing time ahead for small business owners
The full impact of the reforms to the way tax is paid on dividends, announced by the Chancellor George Osborne in the summer budget, is becoming clearer for small businesses as the 6th April 2016 deadline looms. The topic is highly emotive and one that is a cause for concern for thousands of small limited companies across the country.
Currently the most tax efficient set up for a director of a limited company is to receive a small salary up to the limit of their Personal Tax Allowance, which is £10,600 or £883.33 per month for this tax year.
In the situation where the company has made a profit they will pay Corporation Tax at a rate of 20% and a dividend will be distributed to the director. The dividend is paid net of a notional 10% tax credit. If the dividend falls below the Basic Rate Tax threshold of £42,000 the director will not have any further personal tax liability.
Under the proposed tax reforms, as from April 2016 the director of a limited company can still receive a salary up to the limit of their Personal Tax Allowance and Corporation Tax at 20% will be due on any profit made by the company. However, payment of the dividend will be treated differently. A Tax Free Dividend Allowance of £5,000 will be given. After this has been deducted from the total dividends payable, tax will be charged at a rate of 7.5% for Basic Rate tax payers; 32.5% for Higher Rate tax payers and 38.1% for Additional Tax Rate payers.
Local accountant Paul Donno, owner of 1 Accounts Online explains, “This is a significant reform that is going to have a far reaching impact on the owners of limited companies. Effectively, from April 2016, they are going to be paying increased taxes to the tune of 7.5% on any dividend payments received from the company over and above the Tax Free Dividend Allowance of £5000. Without a doubt this is going to hit the owners of small limited companies very hard. Especially family run businesses where there is more than one family member working in the company.
"There are lots of figures being bandied around but the general consensus is that the Chancellor will recoup around £6.8 billion in additional tax over the course of this Parliament. The money will come from small business owners and investors. The winners will be anyone who is earning a dividend of less than £5000, everyone else will be a loser! It has been labelled a tax on success and I have to say I agree with that sentiment.”
Paul and his team at 1 Accounts Online are offering a free telephone consultation during December for any director of a limited company based in Haverhill who has concerns about how the Dividend Reforms will affect their tax position.
If you would like to contact 1 Accounts Online Limited, please call 08448 111 396 or, to find out more information about their services, visit www.1accountsonline.co.uk.