​Budget 2015 – Dividend Income, personal taxes increased for small business owners, but corporation tax decreases

Budget 2015 – Dividend Income

Before the Budget in July 2015, incorporated business owners who remunerated through a minimal wage and then dividends up to the 40% threshold saved around £3,300 in tax when compared to a sole trader. The budget is set to reduce this advantage.

Abolition of the dividend tax credit, from 6th April 2016

The effective tax rate on receiving dividends through a closed Company, up to the 40% threshold, was 20%.

The government has now abolished the 10% tax credit and introduced new dividend tax rates:

Before 05/04/16 After 05/04/16
First £5,00 Nil Nil
Basic rate tax payers Nil 7.5%
40% tax rate payers 25% 32.5%
45% tax rate payers 30.6% 38.1%

This will mean there will be some further personal income tax to pay above and beyond the 20% the Company pays, bringing the company vs. sole trader tax regimes closer together.

What does this mean for the SME business owner?

For a business owner remunerating through a small salary and dividends up to the 40% threshold.

Before 05/04/16 After 05/04/16
Salary £10,600 £10,600
Dividends £28,500 £28,500
Tax paid by Company (£7,100) (£7,100)*
Tax paid by individual Nil Nil

We can see that next year, the incorporated business owner will be £1,700 worse off.

*However the Corporation tax rate is reducing from 20% to 18% by 2020, which will save the Company £700 in the above example. This means the incorporated business owner will only be £1,000 worse off in 2020, when compared to 2015, and therefore still better off when compared to a sole trader.

Conclusion

To incorporate will still be the more attractive option in terms of tax after 05/04/16, however the taxation advantages over sole traders will be reduced. If remunerating into the 40% threshold and beyond, the tax advantage over sole traders reduces to zero over £100,000. However, on a cash flow basis, incorporating will still be advantageous because sole traders are required to make payments on account to HMRC.

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