The changes to taxation of dividends in the Budget will not be welcomed by most business people, who will pay 7.5% more tax on their dividends from 6.4.16 (although with the first £5k a year tax free).
The net effect of this for someone who pays themselves dividends up to their higher tax rate threshold (about £42k) is an extra £2k a year tax.
However, as supporters of employee ownership, we think the possibility of an employee shareholder getting up to £5k a year tax free will make employee ownership a much more attractive proposition for many businesses. Dividends were always tax free for basic rate tax payers but from 6.4.15 every shareholder, regardless of their tax band, will get that benefit.
For business owners going through our Income and Share Ownership Planning (ISOP) process, the good news is that the 7.5% increase will not affect the tax they pay on money paid to them as part of their succession planning. This is conditional upon the ISOP plan qualifying for Entrepreneurs’ Relief and the 10% tax rate, but in every case we have handled we have successfully obtained the taxman’s agreement to this lower tax rate.
This means that, under the new rules, the tax saving on money extracted by the business owner will increase from 15% to 22.5%* – an extra 50% benefit.
(*For a higher rate taxpayer, the dividend tax rate is now 25%, compared with 10% using ISOP, so saving 15%. Under the proposed new rules the dividend tax rate would be 32.5%, so increasing the saving to 22.5%.)
Please note that all this assumes that there are no changes to the proposals announced in the Budget of course.
If you’d like to know more about how the new rules can benefit you or your employees, or if have any questions, please let me or one of our ISOP consultants know.