It is hard to reconcile the Chancellor’s announcement that there will be no increase in tax rates, with the change he has announced to the taxation of dividends, as this change will inevitably result in an increase in the rate of tax payable on dividends.
It seems to me that what the Revenue are trying to get at with this change, is to compensate them in some measure for that fact that they have never been able to charge national insurance contributions on dividend payments.
If we take a small company distributing profits of £10,000 as dividend as an example, under the current rules the tax payable will be £2,000, leaving a net amount of £8,000. Under the new proposed rules however, the tax payable will rise to £2,375, leaving a net amount of £7,625.
This is still a more tax efficient route however that paying a salary, as the total tax and NIC payable in this case would be £4,025, leaving a net amount of only £5,975.
These new rules do not come into force until 6 April 2016, so it is important that dividend payments are planned and executed so that they fall on the right side of the tax year end date, and thus minimise the extra tax as far as possible in this respect. It is likely however, that the Revenue will examine closely the timing of dividends, so it will be essential that the associated paperwork is correctly completed.