The new rules are expected to particularly affect owners of small businesses, who previously benefited from the 10% Dividend Tax Credit, which effectively meant that no tax was payable on income for dividends up to the higher rate tax bands.
This tax credit will be abolished from April 1, and replaced by a new tax-free dividend personal allowance.
Under the new system individuals will not have to pay tax on the first £5000 of dividend income. Beyond that dividend income will be taxed at 7.5% within the basic rate tax band. Within the higher rate tax band the rate will be 32.5% and within the additional rate band the rate will be 38.1%.
For many the changes will mean that business owners or directors who were able to manage their income between a very low salary, to benefit from the personal tax allowance, and dividend to benefit from the Tax Credit will now become liable for both personal and corporation tax payments.
Dividends received by pensions and ISAs will be unaffected.
With April fast approaching it is important that business owners review their current dividend payments before the end of the tax year especially if they have retained profits in their limited company and can vote through dividend payments before the deadline so as to minimise their tax ahead of the changes.
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