Dividend shake-up to hit small limited companies

10 July 2015

Dividend shake-up to hit small limited companiesGeorge Osborne's Summer Budget included a major overhaul of dividend taxation that could have a significant effect on small limited companies from 2016.

Osborne announced that he would be replacing the dividend tax credit with a tax-free dividend allowance of £5,000 for all taxpayers. It means that dividend payments above that amount will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Matthew Hodgson, partner at UHY Hacker Young, said: "This will hit directors of small limited companies particularly hard - many of them are likely to view this as a direct attack.

"A lot of small businesses are structured as limited companies - this means directors can opt to take rewards through dividend payments, thereby minimising personal tax liability. The new measures mean the option to make savings in this way is largely removed."

In a blow to many solo entrepreneurs, Osborne also announced that companies where the director is the only employee will no longer be eligible to claim the Employment Allowance.

However, the Employment Allowance has gone up for other firms; this, along with a fall in corporation tax and other business-friendly measures, has been welcomed by many business commentators.

John Longworth, director general of the British Chambers of Commerce (BCC), said: "George Osborne has delivered a genius balance of politics and economics that provides stimulus for the economy while continuing the tough task of eliminating the deficit. Steady deficit reduction means the economy still has the oxygen it needs to grow."

He said: "Firms across the UK will cheer not just the new permanent Annual Investment Allowance, further corporation tax reductions, and lower national insurance for small businesses, but also commitments to childcare and higher education that help them employ Britain's best."

However, John Allan, national chairman of the Federation of Small Businesses (FSB), described the Budget as a "potentially challenging mixed bag for business". He said: "The increase in the Employment Allowance to £3,000 is welcome although, for many small businesses, it is unlikely to fully off-set the increase in costs brought by the new over-25s National Living Wage rate."

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