Call for new dividend tax to be more than halved

A TV entrepreneur is calling on the government to more than halve the new dividend tax rate so that small companies can avoid a “kick in the teeth” from April.

Neil Westwood, who won investment on the BBC show Dragons’ Den, says that a tax rate of three per cent - not the proposed 7.5 per cent - would be appropriate for micro-businesses.

His suggestion, made to the Mail on Sunday, might please the 47,870 people who have signed a petition against the tax. A debate in parliament must be held at 100,000 signatures.

“If David Cameron or George Osborne had actually run their own small business they wouldn’t do this,” Westwood told the paper at the weekend.

“I can see why they might want to raise the dividend tax for bigger companies, but it feels like a bit of a kick in the teeth [for us smaller companies].”

The Magic Whiteboards creator went onto suggest that dividends are the rewards that one-man bands receive in return for taking “risks and…putting everything on the line”.

Such payments are often regarded favourably because the current 10% tax credit on distributions is notional, and it is this that is due to be abolished from April.

So whereas basic rate taxpayers currently pay no extra tax on dividends, they will from April be given an allowance, under which only the first £5,000 dividend income will be tax free.

Higher rate taxpayers will meanwhile pay tax on dividends at the rate of 32.5 per cent, and additional rate taxpayers will pay at 38.1 per cent. Some of the former will be hardest hit.

To avoid these incoming dividend tax rates, company owners were reported by yesterday’s Financial Times to now be accelerating dividend payments – a strategy recommended to ContractorUK readers back in September but not unreservedly.

One accountancy firm that has been advising businesses whether to bring forward dividend payments before the current tax year ends is Pierce Chartered Accountants (PCA).

Anne Wilson, the firm’s senior tax manager, says that “as a rule of thumb” it will be more financially beneficial to accelerate a dividend payment to before April 5th 2016.

“The dividend can be left on a loan account with the company and drawn down in future years,” she said. “[But] it should be noted that this will also accelerate the tax liability on the dividend to 31 January 2017”.

In line with tax advisory BKL, Ms Wilson believes that the reforms to dividend taxation – condemned as a “tax on success” - will leave the majority of director-shareholders “worse off”.

Tax experts at ADVANCE think the reforms will leave only “some” contractors “marginally worse off,” yet all three firms agree that dividends will remain the most attractive option for PSC contractors.

PCA’s Ms Wilson reflected: “Although it will still be more tax efficient to draw a low salary and top up with dividend income, the benefits will not be as significant as at present. That leaves a window of opportunity that is closing fast.”  

She added: “Most director-shareholders will be worse off as a result of this change. Business owners should draw as much as possible in dividends before the new rules take effect. Time is running out if you want to soften the blow.”