You would have been forgiven for thinking that the £5,000 dividend allowance was an added bonus for small business owners given the initial spin this was given in the Summer Budget. Unfortunately this is not the case and in actual fact the proposed rules are restricting the amount of dividends a basic rate taxpayer can receive free of tax.
HMRC have finally come clean on how the proposed rules will operate and if you click on this link you can see further details and some worked examples here. You can also read our previous blog here.
So how does the dividend allowance work?
Well the dividend allowance of £5,000 falls within your relevant tax band whether you pay tax at 20%, 40% or 45%.
So what is the overall effect of these proposals?
Basically the higher your earnings are, the more beneficial this allowance will be to you. For example you'll save a maximum of £375 as a basic rate taxpayer, £1,625 if you are higher rate taxpayer and £1,905 if you pay tax at the top rate. Therefore if you're a small company owner you're the biggest loser under these proposals.
If you'd like further guidance on how these changes might affect your business please give us a call on 01202 048696 or contact our friendly tax adviser richard@thefriendly accountants.co.uk