The impact on many small business owners however will be very significant indeed. For an owner/director of their own limited company drawing say £40,000 net income per annum they will be over £1,500 per annum worse off from April 2016 as a result of this dividend tax. That is nearly 4% of their net income which the chancellor will be taking from them, every year.
Let's not forget too that this is double tax hit for these small business owners. The company will also pay corporation tax on the profits before they are distributed as dividends. I can't help thinking that this is a way of raising revenue from a group who as a rule tend not to protest but roll their sleeves up and get on with it. A classic 'stealth tax' where a small group will be seriously affected but unlike with tax credits, the people affected are, wrongly in my view, perceived to be wealthy, and will draw little public sympathy.
Drawing £40,000 net per annum is not untypical for many business owners. Personal drawings above this level are taxed at higher rate so are less attractive and in any event, many entrepreneurs want to retain any surpluses in their business, as contingency or to fund growth. In leaner times, many of those affected by this tax will have forgone any income at all in an attempt to sustain their businesses. The chancellor has now seen fit to impose a new tax on income from their 'risk' capital which will hit small business owners very hard.
This is one of those taxes where the effect is not immediate but I believe will have a material impact on the household incomes of small business owners and on their businesses, when it starts to bite. The tax starts in the next tax year 2016/17. It will be collected via personal tax returns and will not be payable until January 2018. As well as the dividend tax due, taxpayers will need to pay a further 50% 'on account' for tax year 2017/18. So it will perhaps be from Autumn 2017 to January 2018, as tax returns are finalised for the previous tax year, when some business owners will realise how much they are going to have to stump up.
If they have not already made provision for the tax or have savings to draw on, they will have a choice of tightening their household budgets or drawing more from their businesses to pay the tax. Either way, I believe a small, hard working, enterprising group, exactly the people the chancellor supposedly wants to help, have been targeted unfairly by this tax. The government will point to positive measures like the planned reduction in corporation tax rates and the increase in the employment allowance which underline there 'business friendly' credentials. For owners of smaller limited companies, with modest profits and no other employees, where these changes deliver less benefit or do not apply, they will not compensate for the adverse impact of the new dividend tax.
Our focus now as business advisors will be to help our clients plan for this new tax and to take steps to mitigate the impact where possible.
The summer budget received a broad thumbs up from small business groups when introduced earlier this year. Now that the dust has settled it is becoming clearer that for owners of the smallest limited companies, they will be significantly worse off as a result of the new dividend tax.
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