Taxing times for business owners

These are taxing times for business owners. Despite the narrative from some political parties that business has had an easy ride, for small businesses at least, this is far from being the case. Let's look at one example - the dividend tax

It was introduced in April 2016, effectively placing a double tax charge on business owners when they draw basic rate dividend income from their company. In tax year 2016/17 company profits are taxed at 20%. If the profits are then drawn as dividend by a shareholder, the first £5,000 is covered by the tax free dividend allowance, above this dividend is taxed at a variable rate depending on the taxpayer's total income. For higher rate tax payers the dividend tax rate is 32.5%. Add this to the corporation tax rate of 20% and that is a sizeable composite rate of 52.5% - ouch!

Well that's old news you may say - we are going back over 12 months to the introduction of this tax. But here's the rub, it will only start to bite over the next few months as business owners complete their personal tax returns for year ending 5th April 2017 and have to pay the tax next January. Many may have heard about the tax but the reality may not dawn until the bill from HMRC lands on their doorstep.

For business owners who have been accustomed to drawing a relatively modest income of around £40,000 and paying no personal tax (remember the company will have paid corporation tax on business profits), they will have the unpleasant task of paying around £3,000 income tax to HMRC before the end of January next year.

Fine you might say, everyone needs to pay their fair share. Agreed, but in my view this places a disproportionate burden on small, entrepreneurial business owners and will have an adverse impact on profits, growth and jobs. Where are business owners going to find the funds to pay the extra tax? For those without personal savings it will need to be drawn from their businesses, many of them hard-pressed and getting by on small margins.This will inevitably have a knock on effect to their businesses. 

It would be nice to see one of the political parties championing small business and providing genuine support. I'm afraid that in a time of austerity and uncertainty we are 'fair game' and I can only see the tax outlook becoming more challenging, whoever wins the 2017 General Election.

If you drew dividends in tax year 2016/17 my tip is to make sure that you are prepared for any additional tax bill which will be due next January. Putting a little aside every month from now might avoid a last minute rush to find the funds when they become due.

More on the dividend tax