Small business owners, particularly those who fall into the higher tax bracket, are being urged to grasp the implications of proposed changes to the ways dividends will be taxed from April 2016.
In his post-Election Budget the Chancellor announced a new Dividend Allowance as a replacement for the existing Dividend Tax Credit. The allowance will be available to anyone who has dividend income and, according to the Government, it will mean that the first £5000 of dividend income is tax-free.
Shortly after the measure was announced in the Budget, HMRC said that the £5,000 voucher would not reduce the level of taxable income for an individual. In effect, this would mean that the first £5,000 of dividends have a 0% tax rate, but still form part of someone’s taxable income. For a higher rate taxpayer it would mean that, although the level of dividends taxed at the basic rate is reduced, it puts an extra £5k of dividends into the higher rate of tax, in so doing increasing the person’s tax liability.
A number of accountants have been quoted across the media discussing the implications of the new tax. One, Mike Cooper, Tax Partner at accountancy firm Moore Stephens has been quoted as explaining that under the new rules, owners of small businesses will have to take a greater percentage of their business’s profits as dividends in order to maintain the same post-tax income. He suggests that this could affect the ability to reinvest in their company as the changes could make investment for future growth less attractive.
Questions have also been raised about the extent to which this move is in line with the Government’s commitment to supporting small business. One entrepreneur, Frauke Golding, has started an online petition asking the Government to reconsider the tax because it “flies in the face of the risk and reward” involved with running a small business. In her petition she writes that “life as a business owner means very long hours, low pay, stress, no holiday or sick pay and a life of uncertainty and worry. There is a real danger that this new tax will have a significant effect on those people brave enough to start up a business that could make a meaningful contribution to the economy”.
The Government must respond to the petition if it attracts 10,000 signatures, and consider a parliamentary debate if it attracts 100,000. It is open until February and, at the time of writing, currently has about 27,500 signatures.
You can access the petition here: https://petition.parliament.uk/petitions/106525