Why small owner managed businesses need to look at their dividend strategy now

Until now the personal tax effect of taking a dividend for owners of small owner managed businesses has been pretty low, but from 6^th April 2016 individuals are likely to see an increase in their income tax liability.

What are the changes?

• The 10% notional tax credit will be scrapped, so you no longer have to gross up your dividend in your personal tax computation.
• A £5,000 dividend nil band will be introduced. This will not reduce a taxpayer’s total income but will be applied to dividend income within their basic, higher rate or additional rate income tax bands.
• The tax rates will be 7.5% for dividends in the basic rate band, 32.5 in the higher rate band and 38.1% in the additional rate band.

Example

This example highlights the advantage (where company reserves allow) of a business taking a higher dividend in the current tax year.

Should I still run my business through a company?

In the short term some business owners may feel disheartened with this tax rise coupled with the additional administrative effort and costs of running a company, however it is worth taking a longer term view. The additional personal tax burden will be eased in part by the proposed decreases in corporation tax rates over the next few years.

What should I do now?

You should always discuss your personal circumstances with your own accountant. If you don’t feel comfortable chatting to your accountant read this.

I love working with small business owners. I’m passionate about really getting to know them and their businesses so I can resolve their specific issues and problems. If you’d like to receive regular tax tip updates or book a discovery call, drop me an email on [email protected] or follow me on facebook at http:/www.facebook.com/pieaccounts