In Wednesday's Budget, the Chancellor announced the dividend tax credit would be replaced with a new tax-free allowance of £5,000 of dividend income for all taxpayers.
George Osborne said it would “simplify the taxation of dividends”. The Government will set the dividend tax rates at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers but there will be no tax credit.
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Andrew Elson CFPCM, owner of Beaufort Financial Planning (Yorkshire) told Financial Planner Online: “I think a lot of smaller firms will have to reconsider the way they pay themselves. In the past a lot of directors moved to dividends as it was more tax efficient, especially with the national insurance (NI) saving. NI is not levied on dividend income.
“This means it saves the employer 13.8% as well as a saving for the employee.”
He said it was important to work with professional connections, especially accountants, to ensure clients get the best outcomes.
He said: “There is more work planned between the link for NI and tax so we need to ensure we and our clients don’t bounce from one solution to another, every time there is a budget, as that won’t look right. One positive note is that if more directors pay themselves higher salaries, they will be able to make higher pension contributions too.”
Nicola Watts CFPCM, director of Jane Smith Financial Planning, said: “Certainly many directors who pay themselves low salaries and remunerate themselves mostly via dividends are going to see their tax bill go up.
“From a personal point of view, I am going to have to think about increasing the income I take from the business, simply to cover the additional tax liabilities I will incur.”
She said: “The advice we give to clients, and company directors in particular, is likely to change. However, with the higher rates of income tax and National Insurance applicable, dividend income is still likely to be more tax-efficient than drawing a salary. However, we are going to have to take account of higher tax liabilities when planning with our clients.”
Parminder Bains CFPCM, Principal at Moorgate Place Wealth LLP, said: “Many small business owners pay themselves by salary and dividends and there will be an impact for them here but I am sure that accountants are planning ahead as we speak on further methods of drawing profits tax efficiently.
“There has been a bit of a trend for professional service firms like Financial Planners to trade as a LLP for future succession planning so they may not be affected and tax considerations don’t always drive the ultimate rationale on what entity to use when trading.”
He said: “There is nothing wrong with paying tax and business owners taking large dividends usually wash out the extra tax liability by investing into VCT/EIS that give 30% tax relief if they are happy with the risk profile.
“In addition, having the business pay pension contributions is still the most tax efficient method of extracting capital. The dividend taxation has been soothed a little by lowering corporation tax to 18% by 2020.”