Dividends Under Attack

Posted on 10 Jul 2015 by

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George Osborne’s budget and subsequent commentary has largely overlooked the impact of changes in the taxation of dividends due to take effect from 6 April 2016.

H M Revenue & Customs have attempted over the last decade or so to attack dividends as disguised remuneration. This change in policy is an undisguised attack on profit extraction in small and medium sized enterprises.

Currently a shareholder/director will take a mix of salary and dividend. The mix will be usually lower salary and higher dividend. Where the shareholder/director is a basic rate tax payer, no income tax liability would arise. The company would have corporation tax to pay.

The new rates (subject to a £5000 dividend exemption, albeit it is not clear how this is to work – i.e. does it only apply to basic rate tax payers?) will be 7.5% for basic rate tax payers. That, put simply, is a 7.5% tax increase!! Coincidentally, the thoughts on the Chancellor attacking pension contributions have not materialised but are thoughts for ongoing discussion.

Owners of small and medium sized businesses (and we are one of those as well) take entrepreneurial risks everyday. Dividend policy has long been held as a reward for being entrepreneurial. Virtually all entrepreneurs put their life assets at risk to make businesses work and grow and thus reducing the potential benefits can only be seen as an attack on this entrepreneurial spirit. In truth, the measured view might be that you’ve never had it so good or more realistically you’ve never had it so good and aren’t going to go again!!

By the way – the reduction in corporation tax rates? No impact whatsoever on the SME market – I am sure we all agree on that!!

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