Earlier this month, the chancellor, George Osborne delivered the Summer Budget 2015, which revealed a whole host of new changes in the light of the recently re-elected Conservative government. Alterations to Sunday trading hours and the new Living Wage were amongst the most talked about announcements but the changes to dividend taxation rates have also been making headlines.
Currently, small business owners who are top-rate taxpayers have the option to grow their company and pay themselves dividend income at a 30.6pc tax rate or sell their business and pay capital gains tax at a rate of 28pc. While the capital gain tax rate will remain the same, top rate on tax on dividend income will increase to 38pc, meaning SME owners will be hit by a £6.8bn dividend tax raid during the next five years.
Osborne’s rewriting of the rules and regulations surrounding dividend taxation came about through his perceived need to review the “arcane and complex” system already in place. Osborne announced that he would replace this complicated process with brand new dividend tax rates and an annual tax-free allowance of £5,000.
In the Budget, the Treasury explained that “the current system was designed more than 40 years ago when corporation tax was 50% and the total bill on dividends for some was over 80%.”
The Treasury claims that these changes will “ensure that ordinary investors with smaller portfolios and modest dividend income will see no change in their tax liability and some will pay less tax.”
It also added: “Combined with the increases the government has made to the personal allowance and the introduction of the personal savings allowance, from April 2016 individuals will be able to receive up to £17,000 of income per annum tax-free.”
But where does this tax raid leave small business owners and investors?
These new dividend taxation regulations will reportedly raise over £2bn per year, making it one of the biggest revenue raisers included in the Budget 2015 proposals. This is on top of the £500m the government will be making through reductions to tax-led incorporations. According to OBR chairman Robert Chote, Osborne’s “tax increases are roughly twice the size of the tax cuts in aggregate”, so where does this leave UK SMEs and their owners?
Many experts fear that the hike will discourage entrepreneurial activity as the dividend tax reforms fall disproportionately on business owners and managers. Dermot Callinan from accountancy firm KPMG pointed out that the changes mean top-rate taxpayers will experience a 25% increase in contributions and may lead many to sell their businesses before the new regulations are implemented. He said: “This reform has the potential to incentivise private company owners to put themselves up for sale.
“We were not expecting this and the new rates has our clients thinking ‘is it better to sell the business ahead of the changes’.”
He added: “For all that the chancellor wants to encourage saving, the new tax structure could discourage many high-income investors from doing so.”
Tax partner at PwC, Alex Henderson also commented on the potential influx of business owners looking to set up shop ahead of the new parliament and the self-employed professionals who pay themselves dividends from company profits. He said explained that for entrepreneurs who pay out dividends in companies they own, tax rates will increase by nearly 20% to 31.8% on top of the 20% paid by the company. It is for this reason that retiring has become a more viable option for many as doing so could reduce tax rates back down by between 10% and 18% through benefitting from ‘entrepreneurs relief’.
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