Tax experts say it may lead many to consider selling up and to some investors cutting investment before the rules are implemented. Small business owners who are top rate tax payers currently have the option of growing their business and paying themselves dividend income at a 30.6% tax rate, or selling the company and paying capital gains tax at a rate of 28%. From next year the top rate of tax on dividend income will rise to 38%, while capital gains tax is set to remain at 28%. Thus selling a business rather than continuing to receive dividends from trading then becomes an even more attractive option for the small business owner.
Dermot Callinan of the accountancy firm KPMG, said:
“This reform has the potential to incentivise private company owners to put themselves up for sale. We at KPMG were not expecting this and the new rate has our clients thinking: ‘Is it better to now sell the business ahead of the changes’.”
Some investors will also share the pain. Under the new taxation rules only the first £5,000 a year of dividend income will be exempt from tax. For dividend income above this allowance, basic-rate taxpayers will pay 7.5%, while higher-rate taxpayers will pay 32.5% tax and those who pay the additional rate of 45% will face 38.1% tax
The Treasury said that the changes will ensure that ordinary investors with smaller portfolios and modest dividend income will see no change in their tax liability – and some will pay less tax. The Treasury also stated that combined with the increases the Government has made to the personal allowance and the introduction of the personal savings allowance (which allows interest on savings accounts to be paid tax-free), from April 2016 individuals will be able to receive up to £17,000 of income per annum tax-free.
KPMG’s Dermot Callinan commented further:
“While a million people who receive dividends will see an effective £5,000 tax-free allowance, the changes will increase top-rate taxpayers’ contributions by at least 25%. For all that the Chancellor wants to encourage saving, the new tax structure could discourage many high-income investors from doing so.”
Sources: www.telegraph.co.uk (Published article: 2015/07/08)