New tax rules for business owners

New rules are about to come in from April 2016 that will change the way many business people are taxed. If you’re a business owner, this could affect you.

Worried businesswoman working with laptop computer, get tax pressureAt the moment, anyone who runs a business using a limited company can take their earnings in two key ways: salary or dividends. I’m generalising a bit, but the gist is that salary is subject to income tax – basic rate of 20%, higher rate of 40% or additional rate of 45%, depending on how much income you have.

In comparison, dividends aren’t a salary, they are a share of profit. They are taken out of a company profits after corporation tax has been deducted – 20% for smaller businesses.

You can currently take dividends without there being any further tax to pay, provided your other income is in the basic-rate income tax band. Higher-rate taxpayers have to pay 25% tax on their dividends. Additional-rate taxpayers must pay 30.6%.

Remember, this tax is on money that has already been taxed in the company by at least 20%.

What are the new rules?

From April 2016 the first £5,000 of dividend income is tax free. That’s great!

But after that, dividends are taxed at 7.5% for basic-rate tax payers (previously nil), 32.5% for higher-rate tax payers (previously 25%) and 38.1% for additional-rate tax payers (previously 30.6%).

That means there’s more tax to pay all round. And if there’s more tax to pay, business owners earn less, and there is less in the pot for their businesses to grow.

If you’re not sure how this will affect you, speak to your accountant – they’ll be able to give you the specific information for you and your business.

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What’s all the fuss about?

Most people running a business are contributing meaningfully to their communities and to the country. They create jobs and pay taxes. They also take a great deal of personal risk. They often earn less than they would do in employment – particularly in small businesses – and forego things like sick pay, holidays and pensions.

Being able to take income out of their business as a dividend and pay a little less tax is recognition of the risk they have taken and their contribution to the growth of the economy. Some of the money that would ordinarily be used to grow their business, employ more people, or put aside to help in leaner times, will now have to be paid out as tax.

We’ve all heard politicians telling us that the small business sector is the backbone of the UK economy and that they want to support its growth. So the question is whether this new tax will help or hinder them?

Find out more…

There is a national campaign underway, started by Serena Humphrey from The F Word, for the issue to be debated in parliament and reconsidered. If you’d like to sign the petition you can do so here

Government factsheet

About Rebecca Aldridge

I’m the Managing Director of Balance: Wealth Planning – named because I know that every decision in life is about finding the right balance. I’m a qualified financial planner and work with people to help them organise their finances and meet their goals. I love learning and adopting new ideas, and you’ll often find me following up interesting links on Twitter or reading the latest books on business or psychology.