The government is nailing the door shut on the tax benefit that used to exist on incorporation (dividends).  Say your salaries, rents, self employment profits, earnings and dividends force you into permanent 40% higher rate tax band.  Worse imagine you end up in the 60% rate band that effectively applies when you are at £100k and personal tax allowances are whittled away.  Well now the government will make it worse still.  The dividends are added to your income, and there is now an extra tax of 7.5%.

Do not forget that a dividend has already been taxed.  20% Corporation tax has already been charged on the profits which fund a dividend (whether or not the business can even afford to give the owner the surplus).  20% on the gross and 7.5% on the residue comes to 26% overall.  That’s for a basic rate taxpayer.  Now dividends are in the top tier of tax.  The Higher rate taxpayer loses 46% and the ‘whittled away’ taxpayer suffers 59%.  Aargh.

This high tax will not go away and is anti small business.

It means that large dividends are not the economic methods of repayment they once were.  In particular you must avoid dividends which take you into the £100k ‘whittled away’ band.  Salaries are now only marginally better than dividends, particularly if the Employment Allowance doesn’t apply.

To compensate for all this, the government gave a £5000 dividends tax free exemption last year.  For something that was previously not subject to an extra tax, this is not much of a concession.  But nevertheless we need to take advantage.  Please plan so that dividends of £5k are paid for each shareholder for 16/17 if possible.

We then have to think how we declare a dividend under the new regime.  A £5k dividend has an odd effect on your tax return.  It appears to be treated as an extra personal tax allowance, a disregard.  We appear not to be declaring the £5k income at all!  Odd.

Beyond the £5,000 dividend we may be in the special position of having to make a supplementary return, because the HMRC tax calculation software appears to be broken.  I wish I was joking, but see this article. 

The big news from the current budget is that even this window will shut after the forthcoming tax year.  The £5000 disregard will drop to just £2000 in 18/19.  At this point paying a salary and a dividend will become roughly equivalent.  This is because Chancellor Phillip Hammond wants to ‘address the unfairness’.