Tony Wickenden: How dividend tax changes will hit owner managers

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Over the past few weeks I have been looking at the dividend, salary and pension choices for SME owners in the light of the significant changes to the taxation of dividends taking effect this tax year.

The financial services sector, understandably, has focused on the impact for investors – not unexpectedly as the impact can be significant. However, the impact for owner managers is also substantial. This is especially so given that while many investors will benefit from the change to dividend taxation, the majority of SME owners will be detrimentally affected by this change.

Here are a few more important examples following those I shared with you last week.

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Example one shows a one-person company wanting to keep income under the £100,000 personal allowance phasing level, with no employment allowance available.

It shows that the dividend route absorbs more gross profit (£10,304.46), which boosts the resulting net income by £13,982.80.

If at least £2,940 of employment allowance were available then, again as in table 2.1 printed in last week’s article, there would be a cut of £735 in the gross profit cost for the salary + dividend option and a corresponding reduction in net benefit of £352.80 due to the employee’s national insurance contributions.

Example two shows bonus, dividend and pension options for a higher rate taxpayer with £40,000 marginal gross profits to draw and no employment allowance available.

It shows that if there is no dividend allowance available, then the net benefit from the dividend route falls to £21,600 – only £1,213.36 more than the bonus route. The pension benefit is calculated as an uncrystallised funds pension lump sum with a marginal tax rate of 40 per cent. If the rate can be kept down to basic in retirement, the benefit rises to £34,000.

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Example three shows bonus, dividend and pension options for a basic rate taxpayer with £10,000 marginal gross profits to draw and no employment allowance available.

It shows that if there is no dividend allowance available, then the net benefit from the dividend route falls to £7,400 – still £1,424.60 more than the bonus route.

Next week I will look at how the pension commencement lump sum could be used in remuneration planning and what to watch out for.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn