Back in 2015 George Osbourne announced a change to dividends tax rate that effectively increased the tax burden on small business owners.
The effects of this were not felt immediately so the change probably passed many by. It is only now that many business owners are receiving their 2016/17 tax returns that the full effect of the change is hitting home.
Before the 2016/17 tax year, the tax rates on Dividends was 0% (up to the basic rate) and 25% (above the basic rate) which meant many business owners had, for many years, been able to earn up to £40,000 per year without paying any Personal Tax or National Insurance.
The level of income now attracts a tax of around £2,000 – in addition because HMRC demand you pay the following year’s tax upfront the actual amount payable in 2018 will be more like £4,000.
For higher rate taxpayers, the rate is now 32.5% vs 25% previously.
Further Bad News
One concession of the change was a £5,000 tax-free dividends amount per year; meaning the first £5,000 of dividends received each year was tax-free. However, this will be reduced to £2,000 adding £225 more tax to basic rate taxpayers and £975 to higher rate taxpayers.
Unfortunately, unless there is a change in government thinking I can’t see this change being reversed. This measure comes from an apparently pro-business government.
