THE BLOG
17/09/2015 12:33 BST | Updated 17/09/2016 06:12 BST

A Tax That Doesn't Pay Dividends

Chancellor George Osborne's Dividend Tax may have hoped to be seen as a way of making fat cats pay their fair share of the tax burden. Faithful to the law of unforeseen consequences, it is in fact having a disproportionate impact on owners of small businesses.

They are in effect subject to a tax double whammy. Corporation tax is paid on profits and a further tax is payable on the consequent dividends that owners take as income - an entirely usual way for owners to reward themselves.

In his Summer budget, the Chancellor announced that from April next year the new dividend tax will be charged at 7.5 per cent for basic rate tax payers, 32.5 per cent for higher rate taxpayers and 38.1 per cent for additional rate taxpayers. Those small business owners who try to keep their dividend receipts below the higher rate starting point are now faced with a tax liability they did not have before. This additional liability is £2,025 for a shareholder withdrawing a dividend of, say, £32,000 and with an £11,000 salary.

The country's job and wealth creators are faced with this extra burden because the deemed basic rate tax credit system has been abolished and replaced by the above dividend tax. The irony of course is that for many small businesses dividends are their only income, and this new tax is income tax in mufti.

These new arrangements are a far cry from the days when the High Street's small men were wont to treat their profits as a 'header tank' that could be turned on to the tune of nearly £50,000 without having to worry about further taxation....

On the plus side, also included in the budget announcement was a new annual £5,000 dividend allowance. This means that any shareholder receiving up to £5,000 in dividends will be in the same position as they were and will not be subject to the dividend tax.

At a pinch, it is still tax efficient for an owner-managed business to pay its principal dividends rather than salary but the tax advantage is getting vanishingly small.