In part 2 of the article on the subject of dividend taxation, i will highlight what is changing from 5th of April 2018.
Many small business owners, trading through limited company rely on dividend rather than salary income. In fact salary may be only a small portion of what they pay themselves, whilst the rest comes from dividend from the retained earnings of the business.
Up until 2016 only higher rate tax payers, would have paid income tax on any dividends. This has changed however with the introduction of dividend tax. The idea to bring down tax differential between employed and self employed has been since then developing and we have seen so far 2 changes in the taxation of dividends. The first one, introduced in 2015, currently in force, has set the first £5000 as dividend tax free threshold and dividend tax rate at 7.5% up to the higher rate threshold, and at 32.5% above the higher rate threshold.
The second change in dividend tax will be effective from April this year (2018). As mentioned in part one of the article, tax free dividend allowance will be reduced from £5000 to £2000, dividend, tax rates remain the same 7.5% up to the higher rate threshold and 32.5% above the higher rate threshold.
Is Running a Limited Company still best way to run A Small Business?
The changes inevitably compel us question if running a Limited Company will still financially outweigh operating from Self Employed - in general it will still be the case as business owners will not be paying so much in National Insurance Contributions (currently 9%). Profits will be however lower and considering the advantages one must rather look at overall benefits of running a Limited Company like greater credibility and the fact that some businesses will only work with Limited Companies. However, individual circumstances must be always a priority when deciding and aiming for minimal tax liability.