Press Coverage: The Telegraph
Originally published in print and at http://www.telegraph.co.uk/business/2016/04/03/business-owners-braced-to-lose-thousands-due-to-dividend-tax-ris/
Tom Berresford, a director at Suffolk-based manufacturing company Bermar, expects to lose thousands of pounds in income next year. He’s not the only one. Across the country, owners of businesses are steeling themselves for a tax change that hikes up the amount they have to pay back to the Government on dividend payments.
Bermar, which makes wine and champagne preservation systems to allow pubs and restaurants to serve more wine by the glass, is a family-run business. Berresford and his father, Richard, run the company together, employing 26 full-time workers.
Like most business owners, they take the majority of their income from the firm in dividends. Business owners have typically favoured this approach because a 10pc tax credit is currently applied to income drawn from dividends. They also do not have to pay National Insurance contributions.
However, from this week the 10pc tax credit will be abolished. Instead, all payments above £5,000 will be subject to a new basic rate of 7.5pc, in addition to the £11,000 personal allowance. Higher rate tax payers will pay tax of 32.5pc above earnings of £31,786, compared to 25pc previously.
Those above the additional rate threshold of £150,000 are looking at a rise from 31.6pc to 38.1pc.
To give an example of what this means in real terms, an individual who pays themselves a basic salary of £11,000 and receives dividend payments of £100,000 will see their total tax bill rise from around £22,600 to £26,500.
“The difference is big enough to warrant a meeting with our accountant, and to pay our tax bills a year early so we can avoid the payments this year. We benefited from other parts of the Budget – such as the reduction in corporation tax – but every year the goal posts seem to move and it makes planning ahead very difficult,” explains Tom Berresford.
Ben Fletcher, an entrepreneur with investments in a handful of digital companies, received an income from dividends of around £110,000 last year. He says his tax bill will now go up by around £8,000. However, he won’t face his first higher tax bill until 2018, as he chose to withdraw any income last month, at the end of the 2015/2016 tax year.
It is expected that many entrepreneurs will choose to pay themselves a month early to delay the tax rise for another year.
“I’m not against paying my fair share of tax. My issue is it feels like the reason for the tax is to clamp down on contractors that are cheating the system by declaring themselves a company. I feel business owners are unintentionally being brought into it,” says Fletcher. “We’re lucky that we are in a strong cash position to pay income a year early, but some owners could end up stretching their company too far.”
Carl Reader, co-owner of accountancy firm Dennis and Turnbull, says the tax changes could dissuade people from setting up businesses. Under the current tax system, he would have advised incorporating a business on profits of more than £25,000, as this would mean a tax saving of £1,250. But under the new system, savings would only be £500 so it may not be worthwhile and individuals may now prefer to operate as a sole trader.
He would now advise incorporating a business if profits are around £50,000.
“This has been quite an attack on small business really, and it’s been an under the radar move. Probably about 50pc of our clients will be affected by this. There are ways that businesses may be able to get round some of it, but it’s never ideal this cat and mouse game between HMRC and business. However, the £5,000 no-tax threshold is great for smaller shareholders,” says Reader.
Critics point out that the tax breaks could have been perceived as giving business owners an unfair advantage over employed workers. The current system essentially means that people are able to pay themselves with only basic rate tax of 20pc and with little National Insurance.
The Government says the new tax structure reduces the incentives for tax motivated incorporations.
“The Government is fully committed to supporting business and entrepreneurship and a fair tax system. Dividend tax reform allows further cuts in Corporation Tax, one of the best ways to support growth and enterprise,” said a spokesman when the changes were announced last year.
Some business owners are finding there are ways to minimise the losses under the new system. Tim Cameron-Kitchen, founder of Nottingham-based digital marketing agency Exposure Ninja, has set up his wife as a 50pc shareholder in the business. This will mean they are able to each withdraw dividends, keeping them out the higher tax bracket.
“I guess the Government are closing a tax loophole, but I do think it goes against entrepreneurialism. The tax breaks were always the advantage to doing your own thing. Now it might just be easier for business owners to pay themselves a salary. But then you may as well be employed and not have the risk of running your own business,” says Cameron-Kitchen.
According to Victor Korman of Cogent Accountants, it is still worthwhile to operate via a limited company rather than being self-employed. He advises that business owners ensure all shareholders in the company are using the new non-taxable £5,000 dividend tax allowance.
Other measures owners can take are paying employer pension contributions from the company instead of personal pension contributions; taking dividends at a level so that the high income child benefit charge is minimised; and not paying all profits as dividend but retaining profits in the company so that dividends can be paid in a more tax effective time.
In the meantime, owners are still getting to grips with what the changes will mean for their business in the immediate future.
Andy Atalla, founder of digital marketing agency Atom42, says it may discourage people from taking risks. "As a business owner, I definitely feel penalised for running my own business. This feels very much like a back-door tax rise which discourages entrepreneurialism and the prospect of new ventures for the future."
For Phil Mowat, founder of Tie Club, which makes and supplies custom-made ties to organisations, it’s another worry at a time when small business owners are already dealing with the cost of pension auto enrolment and the new living wage.
“HMRC can be harsh with small businesses and are unforgiving at the best of times when we really need extra cash flow. The new tax rules are an extra cost we could do without.”