Dividend tax changes: What business owners really think
Osborne's controversial dividend 'tax allowance' comes into effect from April 6. Startups finds out why many entrepreneurs aren't happy with the reform
From April 6 2016, dividend tax will increase by 7.5% to 32.5% – a change which will hit many small business owners and anyone who receives significant income from dividends.
Why will it impact business owners? Currently, small business owners that pay themselves using company dividends receive them net of a notional 10% tax credit meaning that basic rate tax payers whose only, or main source, of income is the company dividends and a small salary, don’t tend to pay any personal tax.
However, as announced by George Osborne in the 2015 Summer Budget, this is all about to change with the introduction of an annual tax-free dividend ‘tax allowance’ of £5,000 for every investor in a company. The “sting in the tail” being that, for those whose dividend income is higher than £5,000, there will be a tax hike from the existing 25% to 32.5% – abolishing the 10% credit.
Rather unsurprisingly, the reform has proved controversial among many business owners and sole traders who believe the changes are somewhat of a “tax on success” with those entrepreneurs that pay themselves last left with a tax bill “when they finally reward themselves for good performance”. In fact, over 57,000 UK business owners have signed a petition calling on the chancellor to reconsider the increase and drop it to 3% as a “fairer measure” (the petition needs 100,000 signatures to be considered for debate in Parliament).
Given the growing debates around the upcoming dividend tax hikes and ‘allowance’, we wanted to hear directly from businesses owners to find out just what their views are on the dividend tax changes.
Read on to find out just what they had to say… One thing’s for sure, the majority of UK entrepreneurs are vehemently NOT in favour:
“It’s a complete joke”
Cathy Hayward, managing director of Magenta Associates:
“I run a small PR business (circa £500,000 turnover) and think the government’s dividend tax changes are a complete joke. It doesn’t take into account the risks that entrepreneurs take when starting up a business, the sacrifices they make – I still earn the same as a I did five years ago when I was employed full-time – and the fact that they are creating jobs within their communities. The previous dividend tax rate took that into account. The proposed hike doesn’t. It will deter people from setting up businesses, and small and medium enterprises are the backbone of Britain.”
“It will put even greater pressure on me financially”
Chris Broadbent, founder and CEO of digital media agency The Internet Works:
“In 2009 my eldest daughter was born and I started my business. Both events fundamentally changed my life in a good way but also shared a number of unexpectedly draining similarities – sleepless nights; endless unforeseen challenges; unreasonable demands on my time and on my finances to name a few!
“Fast forward to 2016 and none of the above has changed. My ‘babies’ are now seven years-old and I’ve adjusted to the fact that I will always have to put them first over my own personal wellbeing. In regard to the business I continue to work every day of the week and still earn less than I did 10 years ago as a successful sales director within a corporate business. I often have to take risks that keep me awake at night and I’m the very last person in the business to get paid – often foregoing my pay altogether to ensure that my team and my suppliers are paid. My salary is £12,000 per annum and the rest of my income is made up of dividends when the business can justify it.
“The government’s plan to raise taxes on dividends will put me under even greater pressure financially to support my family and my company. It is a very unwelcome change and I’ve signed the petition against it here – https://petition.parliament.uk/petitions/106525. Whatever happens though, I’m not going back to corporate life…”
“Individuals with dividend income are not tax avoiders or evaders”
Julia Kermode, CEO of The Freelancer & Contractor Services Association (FCSA):
“Clearly, the system for taxing small businesses lacks any coherence and the latest move to address dividend income means that those small businesses which reward their directors/shareholders via dividends will pay more tax.
“What we have is the result of various strands of the tax system designed for different purposes hitting the small businesses that are the lifeblood of the economy hard once again; the latest changes may require contractors to pay in the region of £2,000 more tax and the increase could be double that for those contractors who share their business with their spouse or partner.
“The chancellor needs to realise that those individuals with dividend income are not tax avoiders or evaders – they have been working within the rules designed by HMRC but this latest move seems to have been introduced in order to “balance the books”. We are concerned that there could be further changes to dividend tax in the coming years and more upheaval for small businesses creating yet more complexity and administrative burdens which the government has pledged to reduce for small business owners.”
“It will unfairly hit lower earning business owners hardest”
Jason Kitcat, micro-business ambassador at Crunch Accounting, said:
“There is no denying that the public purse needs more income so taxes will have to rise, including the dividend tax. Our concern is that the planned 7.5% rise in dividend tax, and abolishing the basic rate’s 10% credit, will unfairly hit the lower earning business owners hardest. Unfortunately the government’s impact assessment system doesn’t even consider small and micro-businesses as a specific segment, so has missed this problem.
“More and more MPs are becoming aware of this issue and we are working with them to persuade government to consider protecting business owners earning under £50,000 per annum from the changes this April.”
“Osborne needs to reduce the deficit but asking small businesses for an extra £1,100 on average is too much”
“7.5% is a huge increase in one year, a more sensible rate for small businesses would be 3%. Small business need to be treated differently to larger companies.
“I am aware George Osborne needs the money to reduce the defecit but asking a small business on average for an extra £1,100 is too much. Small businesses will have to cut back on other costs. The economy is weak at the moment and this could tip the economy back into recession. It is being implemented at the same time as the National Living Wage which is increasing the wage bill by 12%. We also have auto-enrolment pension costs to pay.
“The government should be lowering the tax burden on small businesses to stimulate the economy and create jobs, not increasing it. Politicians need to run a business and see how difficult it is before they implement policies which will hurt millions of hard working business owners.”
“Because of ‘some people’, all small business owners have to pay what appears to be an unfair price”
Mahin Khawaja, director of Adroit Accounts>:
“The tax is completely unfair and shows the government is committed toward only larger companies and discouraging small businesses. On the HMRC’s own website it reads: ‘This measure will help address the incentive for some people to set up a company and make payments as dividends rather than as wage.’ So because of ‘some people’ all small business owners have to pay what appears to be an unfair price.
“But is the rise in rates going to change anything? I don’t think so. Dividends are still going to be cheaper as compared to sole trader class 4 NIC of 9% or Employee NIC for taking higher salary, the margin of saving has reduced.”
And an alternative view:
“Dividends have been a great way for business owners to avoid paying National Insurance”
John Paterson, CEO of Really Simple Systems:
“Taking money out a small company via dividends has been a great way for owners to avoid paying National Insurance. The chancellor has the noble goal of eliminating the deficit between government receipts and expenditure, and there’s only two ways to do this: cut spending and raise taxes. Are the changes fair? Is any tax ‘fair’? It certainly doesn’t make taxation simpler, a purported goal of the chancellor. Just cut the hypocrisy that they are ‘helping small businesses’ instead of simply saying ‘It’s a tax rise’.”
What’s your opinion on the upcoming dividend tax changes? Has the government made the right call? Is the increase ‘unfair’? Or is it a noble way for government to reduce the deficit? Share your comments below.
Wondering what’s the best approach for you? Get a free accountancy consultation here