Small business owners to be hit by tax rises from April 2016. But no one seems to have noticed?
Changes announced in the July Budget statement that seem to have gone largely unreported will mean a large tax increases for many small business owners.
The changes in dividend income mean that anyone running their own small business who earns more than £5000 per year in dividends will now pay 7.5% tax, in addition to the corporation tax they have already paid on the profits from which those dividends are generated.
In circumstances were a business owner made profits of £27500 and paid corporation tax at 20% (£5500) there would be £22000 available to distribute as dividends. This added to the £10000 freepay available to everyone would have meant there was no more tax due for basic rate earners. This was a tax benefit given to those taking real commercial risk and enabled them to pay themselves relatively low wages.
Under the new regime from April 2016, the personal allowance increases to £11000 but corporation tax remains at 20%. Using the same figures, the business owner will now be able to take £5000 in dividends free of tax but will also have to pay an additional 7.5% on the remaining after tax profits if they too are to be paid as dividends. In this scenario £1275.00 more in tax, being 7.5% of £17000. So around £100.00 per month in extra tax on a modest basic rate income.
This is not only double taxation, it also hits real business people as well as the many people in something that looks very like employment but who are paid via a limited company. Whether the latter group should enjoy the same tax climate as the former is open to debate. But either way, everyone will be paying more tax.