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January 14, 2016

Dividend tax changes – are you ready?

Dividend tax changes are looming

Now is the time to think about your profit extraction strategy

The dividend tax system is changing. The Chancellor surprised many last year when he announced that he proposed to abolish the decades old Dividend Tax Credit with new rates of dividend tax from April 2016.

The proposal was met with considerable concern by many business owners who draw part of their income in the form of dividends. With the dividend tax changes fast approaching, it’s vital you understand the new rules and understand the implications for you and your business and your strategy for profit extraction.

New dividend tax rules

From the 6th of April 2016, the first £5,000 of dividend income each year will be tax-free. £5,001 and above of dividend income will have these new tax rates applied:

  • 7.5% (basic rate taxpayers)
  • 32.5% (higher rate taxpayers)
  • 38.1% (additional rate taxpayers)

As we mentioned in our previous article on last year’s Budget, top-rate tax payers, who currently have the option of growing their business and paying themselves dividend income will find that the top rate of tax on dividend income will significantly increase their tax liabilities.

 What you should do now

  • Review your business strategy

The introduction of the new rules gives you the ideal opportunity to really look at your business and review your strategy. What are your business goals? Are you looking to invest in the business and grow significantly or is your aim to make the business as profitable as possible to make it attractive for potential buyers?

  • Consider your trading status

If you run a small limited company, you might want to consider changing to a sole trader or a limited liability partnership. Ask your tax adviser or accountant for more advice on this.

  • Plan your finances

Use the changes as a chance to review your financial situation. How is the business performing against budget? What are your income levels? What are your drawing requirements? How much money are you comfortable to keep in the business and how much profit are you looking to extract?

  • Review and agree future remuneration strategy

You may want to reconsider your current remuneration strategy for shareholders. For example, consider making company contributions to boost your pension contributions. Whatever strategy is appropriate for you, take the time before 5th April 2016, to review your current and future dividend payments. If you have any concerns or questions, discuss these with your tax advisor or accountant.

  • Invest profits back into your business

Make your profits work harder by reinvesting them in the business, such as buying new equipment or improving systems to add value to your business and boost revenues. If you plan to sell your business in the future, this could make it more attractive to potential buyers.

You can read more in-depth information on the Government’s changes to dividend taxation here.

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