George Osbourne’s summer budget includes various changes to the tax scene.
One of those changes affects any owner of a limited company in regards to changes in the taxation of their dividends. These changes are due to come into effect from April 2016.
The owner of a limited company who receives dividends from their company and is a basic rate taxpayer, currently pays no tax on those dividends. However, someone who is a higher rate tax payer is currently taxed 25% on their dividend income.
Although details are yet to be confirmed, from 6th April 2016, there will be no tax on the first £5,000 of dividend income. Any dividends received in excess of £5,000 will be taxed at 7.5%, 32.5% and 38.1% respectively for basic, higher and additional rate taxpayers.
These changes made present a significant increase in the amount of tax payable for owners of limited companies who take the majority of their income in the form of dividends. Every business varies due to the level of dividends paid and other incomes a tax payer receives. The changes do outline the fact that the majority of business owners will have to pay more tax. With the new changes being brought in, it may be more beneficial to trade as a sole-trader or partnership than through a limited company but this needs careful consideration depending on individual circumstances.
Due to these changes, cash extraction should be considered over the next couple of months. To avoid higher tax rates, it may be beneficial to accelerate dividends within the company accounts (and pay additional tax in 2015/2016). Others may consider holding off on paying tax, but this could mean a higher amount of payment overall.
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